Highlights of the RMA Risk Management Conference

RMA Journal, The, Nov, 2003

Attendance was high at RMA's 2003 Risk Management Conference, which took place in October at Baltimore's sparkling Inner Harbor. Keynote addresses were delivered by L. Phillip Humann of SunTrust Banks and Amy Woods Brinkley of Bank of America. The RMA Journal begins its coverage with Mr. Humann's address.

Giving Credit Where Credit's Due

Excerpts remarks by L. Phillip, chairman, president, and CEO, Sun Trust Banks, Inc.

Banks today are, understandably and properly, focused on credit quality. At the same time, we're confronting real-world operational and market-related risks that were hardly even blips on our radar screens just a short time ago.

That said, I feel very good about our industry's ability to handle whatever risk-related challenges are out there. I say that, in large measure, based on the good job our industry's done these past couple of years in navigating some very turbulent credit waters, so to speak.

Today, the economy is accelerating and, overall, our industry is in pretty good shape. In addition to decent earnings momentum, banks enjoy stronger capital positions than at any time in a generation, good reserves, healthy balance sheets, and more diversified earnings streams. Even stock prices are showing some life.

A big factor--arguably the biggest factor--in the improved performance picture for banks is improved credit quality. At the bigger banks, trend lines in all key measures of asset quality have been moving in the right direction for the past several quarters. It's reasonable to assume we'll see further declines in both NPAs and charge-offs.

Don't get me wrong. There's still uncertainty out there, and I don't have to tell you that credit devils are always lurking. But I don't think it premature to step back, look at where we are and how far we've come, and point with pride at the way our industry has managed through this last, very tricky credit cycle.

What you saw, I think, was clear evidence of our industry's ability to take lessons learned last time around and translate them into better lending practices this time around. For example, you didn't see widespread financing of speculative office buildings, or out-of-market or nonrecourse lending, like you did a decade ago.

Positive changes that came about after the early 1990s recession go beyond real estate. Banks, by and large, weren't victimized by the corporate fraud that got so much attention last year. Early warning systems worked and banks had actually been selling down their exposures prior to the unraveling at names like Enron, WorldCom, and HealthSouth.

We've had, I think, more focused management concentrating on more consistent growth businesses--such as middle-market lending, smaller business banking, and retail credit.

Whatever else you may think about it, the rash of bank mergers in the mid to late 1990s, especially among big banks, was also a good thing in terms of making our industry less vulnerable to cyclical credit problems. Bank consolidation resulted in improved capital bases, brought more geographic and borrower diversity to loan portfolios ... and it spurred adoption of better risk-based credit practices at banks that did the acquiring.

Banks' vulnerability to credit cycles was further reduced as more active capital markets have helped spread risk around. The secondary corporate loan market and the credit derivatives market are two examples that come readily to mind.

What it boils down to is that our industry today is more strategically focused on delivering lower risk, and therefore more consistent, predictable earnings, than in prior cycles. Maintaining that focus requires us to continue to manage risk rigorously. There's no question in my mind that a profitable, well-run bank that enhances shareholder value consistently and predictably needs a disciplined credit culture to make it happen.

The connection between asset quality and shareholder value is of some interest to me. Research confirms that stocks of banks with good credit quality enjoy more price stability and less volatility and that they recover from recession-driven lows more quickly that stocks of banks with poor credit quality.

Let me be clear about this: our industry has always done better in good times than in bad times, and I don't expect that to change anytime soon. But we have proven ourselves to be better risk managers over the past decade. As a result, I believe our earnings vulnerability to recession-related credit problems is much less than historically has been the case.

But as I see it, there's still a market perception that, come a downturn, bank earnings across the board are automatically going to be hit by big credit problems. Based on the record, I don't believe such a perception is justified today. So to the degree that bank stocks are automatically and indiscriminately punished because of it, well ... my message is that we deserve a break!

The good news is that I think some of the more thoughtful members of the investment community are coming to appreciate this new reality.