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."

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.