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January 15, 2001

Salomon Research Team Sees $33B In Loan Defaults In '01
By Tara Siegel, Dow Jones Newswires

Top 10 List of Worst Lenders ... Weiss comments

NEW YORK - Guessing which American corporation is next in line to declare bankruptcy and which banks have loaned them money has become a daily routine on Wall Street.

And Salomon Smith Barney's bank equity research team has done its part of the figuring. After a couple of months of research, headed by bank analyst Ruchi Madan, Salomon culled a "watch list" of national credits that may default this year, and estimated how much individual banks may be at risk.

Bankers were a bit more lax in their lending standards around 1996 to 1998 - the very loans that began causing problems in the face of a healthy economy last year, and which are expected to continue to be troublesome.

Loan defaults are expected to hit about $33 billion this year, with about $29 billion likely to occur in the first half, Madan found. She expects about $9.7 billion to show up in last year's fourth quarter, for a total of $23 billion in 2000.

Some of the largest loans on the "watch list" include Xerox Corp.'s (XRX) $7 billion, J.C. Penney Co.'s (JCP) $6 billion and Finova Group Inc.'s (FNV) $4.7 billion. The largest credits faced by asbestos-liability claims include Owens-Illinois Inc. (OI) with $4.5 billion in loans, Crown Cork & Seal Co. (CCK) with $2.5 billion, and Federal-Mogul Corp. (FMO) with $1.75 billion.

So in whose books are the potentially troublesome loans lurking?

Bank of America Corp. (BAC) is estimated to have credit exposure of $4 billion to Salomon's $51 billion watch list, $1.3 billion of which is asbestos-related. Factoring in likelihood of default, Madan estimates exposures of $2.8 billion; that translates into losses of an estimated $1.9 billion, assuming a loss of 25% on total exposures, she said.

Bank of New York Co. (BK) is seen with $150 million in commercial credit costs. Bank One Corp. (ONE), with an exposure of $2.2 billion - or $1.4 billion factoring in probability of default - is forecast to incur $875 million in credit costs.

Comerica Inc. (CMA) is seen having a $296 million credit exposure to the watchlist, or $220 million on a weighted basis factoring in probability of default; FleetBoston Financial Corp. (FBF) comes in at $977 million, with $545 million on a weighted basis; First Union Corp. (FTU) is estimated with total exposures of about $1.1 billion, or $719 million on a weighted basis.

J.P. Morgan Chase & Co. (JPM) has loan exposure of about $2.1 billion to the watchlist, or $1.4 billion on a weighted basis. Keycorp (KEY) is at $435 million total, with a weighted exposure of $253 million.

National City Corp. (NCC) has a total exposure of $147 million, or $123 million weighted; PNC Financial Services Group Inc. (PNC) has a total exposure of $300 million or $183 million on a weighted basis; State Street Corp. (STT) has a $98 million total exposure, or $61 million weighted. The combined entity from the proposed merger of U.S. Bancorp (USB) and Firstar Corp. (FSR) is estimated to have a weighted exposure of about $250 million, Salomon figures.

Wachovia Corp. (WB) has a total exposure of about $382 million, or $243 million on a weighted basis. Wells Fargo & Co. (WFC) is projected to have $209 million in credit exposures to the watchlist, or $178 million on a weighted basis.

Madan cautions that quantifying the potential size and risk of credit quality has "proven to be an art, not a science." However, she concluded that the end of "credit fear seems to be in sight, assuming a soft economic landing."

If you weren't already convinced of the gravity of the nation's credit crisis, investment firm Salomon Smith Barney reveals that some of the largest banks in the country face crippling defaults by troubled corporate borrowers.

Not only have "troubled" loans hit a whopping $51 billion, but $33 billion of those loans may end up in default -- a 50% increase over last year's default levels.

But even that estimate is conservative. Salomon Smith Barney doesn't count the big California utilities as default risks even though reports tell us that they're going to be out of money as of tomorrow. Bank of America alone could see its exposure balloon from $4 billion to as much as $10 billion if the situation in California erodes any further.

What's more, Salomon Smith Barney's estimate assumes a soft landing for the U.S. economy. If the economy plunges into recession, the number of loan defaults will take off like a rocket. Just weeks into the New Year, 2001 is already looking as if it's heading into the record books as one of the worst years in banking history.

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