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BANKING ENTERS '91 MORE VULNERABLE TO RECESSION

The banking industry, which has suffered a tough year of dividend cuts, layoffs and rising loan woes, isn't expected to see much relief in the recessionary climate of 1991.

"I'd say the banking industry is probably overall in the worst shape it's been since we've been rating banks in the early 1970s," said Christopher Mahoney, a banking analyst for Moody's Investors Service in New York. "We have more troubled banks, more large troubled banks, than ever before."

"If there is a severe recession, it will be extraordinarily difficult for banks to deal with," said James McDermott, an industry analyst at Keefe Bruyette & Woods Inc.

Part of the problem is that banks have been cutting costs and selling assets for three years to shore up their capital positions.

"The margin of error has diminished," said Brent Erensel of Donaldson Lufkin Jenrette. "I'd expect no change in 1991 from 1990 without the economy strengthening in the second half of the year."

Most recently, Citicorp, the nation's largest banking company, said it was slashing 8,000 jobs, or 9 percent of its work force, and cutting its dividend nearly in half as it battles a rising pile of sour real estate loans.

The bank's action follows similar moves this year by its biggest rivals, including Chemical Banking Corp., Chase Manhattan Corp. and Security Pacific
Corp.

The banks have been hit by a downturn in real estate that has been most pronounced in the Northeast.

Hopes for a turnaround in the industry hinge on a rapid recovery for the economy and a pickup in spending by consumers and businesses.

"I view 1991 with caution and suspicion," said Dillon Read and Co. Inc.'s Felice Gelman. "It's going to be a hard year."

Industry problems have sapped the federally backed fund that protects depositors, leading its chief to call for a cash infusion, either with higher premiums or a one-time charge.

L. William Seidman, chairman of the Federal Deposit Insurance Corp., estimates that the fund could
lose $5 billion next year, more than half its capital. But while hundreds of banks are in danger, analysts believe there is little chance for a repeat of the savings and loan debacle, which may cost taxpayers $500 billion.

As the year ends, most economists believe a recession has begun, and banks have tightened the screws on lending to avoid being stung yet again by loans that go bad.

The Federal Reserve has tried to reverse that trend, using all its tools to encourage banks to lend and consumers and businesses to borrow. The central bank recently took the most direct action yet by lowering its discount rate, which is expected to lead to a decline in bank prime rates and increased demand for loans.

In fact, some say a healthy dose of cost-cutting and lending discipline could rejuvenate the industry.

"We have weathered this kind of storm before and we will weather this one as well," Treasury Secretary Nicholas Brady said recently.

But the prospects for the economy are far from certain.

So far consumer defaults on loans have been slight and profits buoyant. A deep recession, possibly aggravated by higher oil prices from the Mideast crisis, would force more credit losses and strangle profits in 1991, analysts said.

In fact, some say a healthy dose of cost-cutting and lending discipline could rejuvenate the industry.

"We have weathered this kind of storm before and we will weather this one as well," Treasury Secretary Nicholas Brady said recently.

But many analysts are betting on a short, shallow economic downturn and say that 1991 bank earnings will be a bit above dismal 1990 levels.

"Next year is going to be better than in 1990, but still sub-par," said Stephen Berman, banking analyst with County Securities USA in New York.

Profits next year at many banks may shine next to earnings in 1990, when so many banks aggressively built reserves in anticipation of future deterioration or took restructuring charges in anticipation of slowing revenues, analysts said.

Also helping 1991 earnings will be the cost savings from 1990's job cuts that will begin to add to the bottom line.

"Through the 1990s we'll see most banking companies concentrate on establishing strong domestic operations," said Robert Dugger, chief economist for the American Bankers Association trade group.

Dugger also predicted more bank marriages of convenience.

"I suspect there will be many mergers of banks to economize on their operations -- interstate and intrastate -- and improve profitability," he said. "This consolidation process will continue through the 1990s."

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