Four California banks-Union Bank, First Interstate, Bank of California and Wells Fargo-are among the top banks nationwide with the largest exposure to potentially risky real estate construction and development loans, a survey released Friday shows.
Several out-of-state units of California banks also have high exposures, according to the survey published by U.S. Banker magazine. Security Pacific Corp.'s Arizona operation had the highest level in the nation, although that unit is a small part of the Los Angeles banking company's overall operations.
Although some banks here could be vulnerable to a real estate downturn, statistics from regulators show that real estate-related problems among California banks are nowhere near the troubles facing institutions in the Northeast. And officials of some of the California banks in question contended on Friday that their real estate loan portfolios are of top quality or are in strong markets.
The survey comes amid increased nervousness among investors, banking experts and regulators as both residential and commercial real estate markets have softened in once-booming areas, mainly in the Northeast and Arizona. The spreading problem has led to concerns that real estate free-falls experienced in New England this year and earlier in Texas could hit California-a position generally disputed by economists and banking experts.
The U.S. Banking survey, conducted by Alex Sheshunoff & Associates of Austin, Tex., measured exposure as the ratio of a bank's construction and land development loans to its equity capital. Figures were compiled using data from the second quarter ended June 30.
The survey found that at least 40 of the nation's 100 largest banks have lent more than 100% of their equity-a measure similar to net worth-to finance risky construction loans.
The percentage for Union Bank in San Francisco, a unit of Bank of Tokyo, was 239%. The level for San Francisco-based Bank of California, a unit of Japan's Mitsubishi Bank, was 207%. First Interstate's California unit, based in Los Angeles, had a 181% level. San Francisco-based Wells Fargo's was 179%, and Security Pacific's Arizona unit led all at 347%.
But many lenders and economists believe that the situation for California lenders is markedly different than for lenders elsewhere, even though there has been sluggishness in office and hotel markets here, and the high cost of housing is squeezing potential buyers.
They note that the state's economy is still strong and diverse, demand for housing continues strong and widespread overbuilding has not occurred. Last week, economists with the Federal Reserve Bank of San Francisco said they saw no signs of a real estate recession in California. Indeed, most real estate problems for California banks are at Arizona and Texas units.
U.S. Banker Editor Robert A. Bennett said the survey is not meant to imply that banks involved in extensive construction lending will have problems, nor is it meant to predict which ones will suffer losses. But, Bennett said, banks with the highest exposure could face big losses if the nation's real estate downturn continues to spread and worsen.
Real estate loans include residential loans, such as home loans and home equity loans, and commercial real estate loans, typically those used to develop, build and purchase apartment buildings, housing tracts, shopping centers, office buildings and hotels. Commercial real estate loans are especially risky because of the volatile market.
Banks in California have increasingly turned to real estate loans, which is a higher-profit, higher-risk business. In the quarter ended Sept. 30, the portfolio of California real estate loans made by banks totaled $98.9 billion, up 25% from a year earlier, according to figures from the Federal Deposit Insurance Corp.
FDIC statistics show that the percentage of bank real estate loans made in California that are either 90 days or more past due, or do not earn interest, has actually dropped within the past year. As of Sept. 30, the percentage was 1.86% of $98.9 billion in real estate loans, 27th among states in the nation. That compares to 2% at June 30 and 2.26% at Sept. 30, 1988.
California's percentage also was below the national averages of 2.84% on Sept. 30. In addition, FDIC figures show that although real estate loans make up about 42% of the total loan portfolio of banks in California, that is not unusually high by national standards.