An Update on Emerging Issues in Banking 

Telecommunications Sector, Bruised and Battered, 

Looks to a Brighter Future

June 20, 2002 

Summary

The FDIC actively monitors conditions in the economy and major industry 

sectors as part of its financial risk management activities. Since the middle 

of 2000, the telecommunications industry has been shaken by the 

convergence of several adverse forces, including the U.S. recession, the 

dot-com collapse, and a sudden scarcity of new capital market financing. 

An FDIC Bank Trends report issued today summarizes current conditions 

and future prospects in the telecommunications industry.

D

Commercial banks specialize in the management of credit risks, particularly 

those associated with commercial loans. Evaluating the prospects for an 

individual commercial borrower or an industry sector is a highly subjective art, 

requiring the lender or portfolio manager to gauge current conditions and to 

look ahead at how conditions may evolve over time. The telecommunications 

sector presents a particular challenge to lenders and analysts at the present 

time because current conditions are clearly weak and there is uncertainty over 

how and when a recovery in the sector may ultimately unfold. 

The FDIC carefully follows trends in the general economy and in key industry 

sectors, and does so with three main goals in mind. First, to the extent that 

insured institutions have credit exposures to sectors such as 

telecommunications, the FDIC must incorporate an evaluation of those 
exposures into its overall assessment of likely failures among insured 

institutions over the near term. Second, the FDIC has established processes to 

continually exchange information between its analysts and bank supervisors 

so that both can be better informed as to the prospects for the industry and the 

degree of risk in bank credit portfolios. Finally, the FDIC also communicates 

directly with lenders and outside industry analysts on emerging trends in the 

economy and credit portfolios in the belief that frequent dialog leads to better 

risk management on the part of all concerned. 

Today, the FDIC published a Bank Trends report by Senior Financial 

Economist Stephen C. Gabriel that discusses current trends and future 

prospects in the telecommunications industry. Over the past two years the 

industry has been battered by forces ranging from a slowing economy and 

plunging stock prices to a withdrawal of primary sources of capital. The result 

has been rising credit risk, growing losses, and mounting bankruptcies and 

defaults. Although the long-term prospects in telecommunications are more 

encouraging, the more profitable times of the future will have to wait for the 

current scenario of stress and consolidation to run its course. 

For the full Bank Trends report, entitled "Telecommunications Sector, Bruised 

and Battered, Looks to a Brighter Future," go to: 

http://www.fdic.gov/bank/analytical/bank/index.html

Last Updated 06/20/2002 

Chart 1

Net Income of Telecom Services Firms Plunged in 2001 as Sales Retreated

Year

Telecom Services

Net Income

(Million $)

Telecom Services

Sales Revenue

(Million $)

1994 18,473 213,399 

1995 15,241 225,238 

1996 17,728 242,040 

1997 17,868 259,286 

1998 20,921 288,695 

1999 22,527 319,437 

2000 24,904 346,141 

2001F 5,008 325,374 

2002F 8,198 338,325 

2003F 20,048 368,378 

F designates forecast figure.

Source: Economy.com