BankAmerica Expects Flat Earnings as Large Loan Losses Continue
BankAmerica, in another unwelcome surprise, announced Tuesday that it expects to report little or no profit in the second quarter because of continuing large loan losses.
The news is doubly bad because it follows a strong first quarter, which led many analysts to believe that the bank was getting its expense and loan problems under control.
The market reacted quickly and harshly to the latest shock. BankAmerica common stock was the most heavily traded issue on the New York Stock Exchange, falling $1.875 to $19.875 on volume of more than 3.1 million shares. Normal daily trading is about 460,000 shares.
Meanwhile, Moody’s Investors Service placed $7 billion of long-term BankAmerica debt under review for possible downgrading because of the prospect of weak earnings.
Disappointed bank officials said they wanted to get the news out before rumors of worse problems began to circulate.
Higher Than Expected
“While the quarter is not complete, it now appears that losses in several sectors of the loan portfolio--particularly in the foreign, commercial real estate and agriculture segments--will be higher than anticipated, and we felt the market ought to know now,” BankAmerica President and Chief Executive Samuel H. Armacost said.
“These segments have been especially affected by the impact of the strong dollar and disinflationary forces and have not responded to the general trend of economic recovery.”
Tuesday’s announcements may not be the end of the bad news. The bank currently is undergoing examination by federal auditors, who are said to be taking a tough line on its evaluation of its assets and may require a further devaluation of troubled loans and foreclosed real estate. In addition, federal regulators who review the risk of bank loans to foreign countries are expected to demand additional charge-offs for a number of countries where BankAmerica has substantial outstanding loans, including Bolivia, Nicaragua and Poland.
The San Francisco-based bank holding company, parent of Bank of America, the nation’s largest bank, reported net income of $110 million for last year’s second quarter and $114 million for 1985’s first quarter.
Analysts generally had expected the bank to post second-quarter earnings of between $75 million and $100 million.
Comes as Surprise
“We never dreamed it would be this bad,” said Lawrence W. Cohn, first vice president and senior bank analyst at Dean Witter Reynolds. “There were indications that (loan) losses were up over the first quarter, but no one anticipated they would be up as much as this.”
BankAmerica’s big multinational competitors, which registered healthy first-quarter figures, are expected to report “spectacular” second-quarter numbers, Cohn said.
BankAmerica did not release estimated loss figures for the second quarter, saying only that loan-loss reserves would be up “measurably” from the first quarter, when the company set aside $209 million to cover bad loans. Analysts said they expect the second-quarter addition to loan-loss reserves to approach $300 million.
Harvey Gillis, the bank’s chief financial officer, said a variety of factors converged to reduce anticipated profits to near zero. The bank wrote off its investment in a foreign affiliate--which industry observers believed to be a bank in Africa, although the bank would not specify--and lowered its estimate of the value of a variety of properties acquired through foreclosure.
In addition, Gillis said, securities trading yields were “disappointing,” and the strong dollar and declining property values hurt many of the bank’s agricultural customers. Falling interest rates cut potential revenues.
“All the things that could swing either positive or negative have all swung negative,” Gillis said. “We’re continuing to make progress on expenses, but everything else lined up against us. We were surprised and we wanted to get this information out to the market.”
Mark Biderman, bank stock analyst at Oppenheimer & Co. in New York, said bad news from Bank of America no longer surprises him.
“The saga continues. B of A is continuing to have problems coping with the deregulated environment. While the loan losses may be the impetus to weak earnings, the underlying problem is they are not generating sufficient revenue to absorb these losses.
“Their foreign losses are high, but they’re not that much higher than Citibank’s, and they shouldn’t reduce earnings to zero. The bank is not growing. They’re kind of stumbling for a position or direction, and this is what’s really hurting them.”