In spite the "scare headlines" about the deteriorating state of the savings-and-loan and thrift industry, Standard & Poor's Corporation of March 19 announced that it has only lowered its investment opinion on the commercial paper of six of the thrifts while keeping it the same for 28 others.
The rating changes, from A-1 to A-2 for the six thrifts, "primarily reflect these institutions' deteriorating financial condition due to high interest rates ," said the service. However, S&P added that although the earnings ability of the savings and loans and thrifts was undermined over the short term, "the long-term outlook remains favourable. . . ."
The six thrifts whose ratings were lowered included buckeye Federal S&L, Columbus, Ohio; Central Federal S&L, San Diego; Downey S&L, Costa Mesa, Calif.; First Federal S&L, Detroit; Guarantee S&L, Fresno, Calif.; and Valley Federal S&L, Van Nuys, Calif. The lower rating will mean that these banks will have to pay higher interest rates on their commercial paper borrowings.
In spite of the current negative business environments for the thrifts, S&P said they contained some basic strengths:
* Healthy liquidity and substantial borrowing flexibility.
* A low amount of problem loans.
* Active regulatory support by the Federal Home Loan Bank system and the Federal Savings and Loan Insurance Corporation.
* Liberalized regulations to permit more rate-sensitive mortgage instruments.
* Expanded consumer lending powers that also give it flexibility.
S&P pointed out that although none of the 34 thrifts it rated lost money in 1980, their return on average assets fell to 0.38 percent from 0.82 percent in 1979.In 1981 management of the institutions is predicting a further decline to 0 .18 percent. This estimate is based on a decline of 200 to 300 basis points in interest rates.
However, S&P, in a more conservative estimate based upon current interest rates, says "We expect a good many of the thrifts we rate to record losses, with some losses approaching 0.50 percent of assets."
S&P says the use of renegotiable rate mortgages is an important step in allowing the thrifts to solve the problem of interest rate risk. The S&L are burdened with low mortgages during a time of sharply rising interest rate costs. However, with renegotiable rate mortgages, the interest rates can be adjusted by up to 500 basis points (5 percent) over the life of the mortgage. Thus, if rates continue to rise, the mortgage likewise will rise.
S&L can also make consumer loans of up to 20 percent of their asset base.This new feature, says S&L, will also help them solve their interest-rate problems by allowing them to keep their loan portfollios closer to market rates. This in turn will gene rate high yields.