The Aggressive Growth of Continental Illinois

Continental Illinois had a history of conservative lending, however in the mid-1970's its managementbegan implementing a growth strategy focused on commercial lending, explicitly setting out to become one of the nation's largest commercial lenders. By the year 1981, Continental Illinois had turned out to be the largest C&I lender in the United States. Between 1976 and 1981 Continental Illinois' C&I lending skyrocketed from around $5 billion to more than $14 billion, a jump of 180 percent. Meanwhile, its totals assets rose from $21.5 billion to $45 billion, about 110 percent. We can see the extent of this growth by comparing it to the rise in Citibank's lending, from $7.7 billion to $12.5 billion, while its total assets rose from $61.5 billion to $105 billion, a hike of 70 percent. Even as its share price was on the decline during late 1981 and early 1982, many stock analysts continued to recommend purchase of Continental shares. From 1977 to 1981, the bank's average return on equity(ROE) was 14.35 percent, second only to Morgan Guaranty's 14.83 percent. Over the same period, Citibank's return on equity was 13.46 percent, whereas FirstChicago, Continental Illinois' cross-town rival, had around 9.43 percent.

They had one of the lower equity levels of the large banks with an avergae of 3.78 percent, making it the 7th out of 10. In addition, asset and loan growth at Continental was at least matched by growth in the bank's equity ratio, which rose from 3.55 percent at the end of 1976 to 4.31 percent at the end of 1982.However, there were two important aspects of Continental's financial profile that, with the benefit of hindsight, were indicators of the increased risk the bank took on during its growth period: 

1) Continental's loans to assets ratio increased dramatically from 57.9 percent to 68.8 percent between 1997 and 1981 2) Although Continental's return on assets was adequate over this period, it hovered at around 0.51 percent; with a higher percentage of assets in loans, the average loan had to have been earning less at the end of the period than it had been at the beginning, implying that over time, Continental was originating loans with lower interest rates than those on the books in 1978

GIVEN THE LARGE INCREASE IN INTEREST RATES OVER THIS PERIOD, IT IS VERY LIKELY THAT THE BANK MIGHT HAVE ADOPTED A BELOW-MARKET PRICING STRATEGY!!!

This suggests that Continental's lending style might have been overly aggressive. The bank's growth was attributed partly to its zeal for occasional transactions that carry more than the average amount of risk. This monstrous growth was also perceived to stem from aggressive pricing. A Chicago competitor noted in 1981 that "even with a 20% prime they were doing fixed rate loans. I don't know how they do it."  
Late in 1981, however, problems were beginning to surface. The bank's second-quarter earnings fell 12 percent, a drop that CEO Roger Anderson explained was largely the result of backing interest rates the wrong way. In the first six months of 1982, NuCorp Energy lost more than $40 million, and Continental had a large portion of the company's debt. Continental had also lent $200 million to the near-bankrupt International Harvester. After peaking approximately 42 in June 1981, Continental's share price declined almost 37 percent during the next year. Many stock analysts believed the reaction was over done and the downturn in stock price more psychological than fundamental. Yet in March 1982, when Fitch's Investors Service Inc. downgraded six large banks' ratings, Continental retained its AAA rating.