Financial experts warn economy may 'muddle along'

By MATEUSZ PERKOWSKI

Capital Press

Banks in the U.S. are showing signs of continued financial improvement, with agricultural lenders performing particularly well, according to federal statistics.

However, some agricultural economists warn not to infer too much from the positive news, as the U.S. financial system is still in a precarious situation.

"I don't see anything immediately that looks like we're going to fall off another cliff, but then I don't see any sign that we'll surge up either," said Mechel Paggi, director of Fresno State University's Center for Agricultural Business.

New statistics from the Federal Deposit Insurance Corp. indicate several favorable year-to-year trends within the overall banking industry, such as rising profits and dropping bad debt losses.

According to FDIC data, roughly 1,500 agricultural banks across the U.S. have outperformed the lending industry as a whole in several key measures during the first half of 2010:

* Return on equity among ag lenders rose more than one percentage point since the end of 2009, to about 9 percent. To compare, the overall industry saw a 5.5 percent return on equity, up from less than 1 percent last year.

* Agricultural lenders charged off about 0.5 percent of total loans as bad debt while the banking industry as a whole reported a charge-off rate of about 2.75 percent.

* Less than 8 percent of ag lenders were unprofitable, down from about 11 percent at the end of 2009. Across the entire industry, roughly 20 percent of institutions were unprofitable, a decrease from about 30 percent last year.

These statistics don't include banks within the Farm Credit System network of lenders, which also recently reported increased profit and stabilizing creditworthiness.

Though improvement is clearly visible throughout the banking sector, the industry is being compared to a low baseline of performance, said Vicky Salin, agribusiness and finance professor at Texas A&M University.

"The biggest grain of salt on any bank result is that it's up from a complete disaster in the past few years," she said.

While banks report stronger results, it should be remembered that many have gone out of business -- for that reason, the overall industry appears more profitable, said Thorsten Egelkraut, an agricultural economist at Oregon State University.

Surviving lenders have also cut their losses and remained scared of making the same mistakes that led up to the financial crisis, he said.

"They've become more careful in terms of lending," Egelkraut said. "Banks are aware of the risk."

While shedding the riskier customers from their loan portfolios, banks have benefited from a wider spread between the interest rates at which they borrow money and the rates they offer to clients, said Dave Kohl, retired agricultural economist from Virginia Tech.

If the current economic trajectory remains constant, the U.S. will probably "muddle along" for the foreseeable future without sliding back into a steep recession, he said.

However, an economic shock -- such as a sudden surge in oil prices or another crisis -- could derail even the slow recovery, Kohl said. "We are one trigger event away from putting us into a double dip."