Hefty Loan-Loss Provisions Cut Into Big Banks’ Profits

Earnings at a number of the nation’s major banks were generally higher in the last three months of 1986 and for the full year but were limited by high operating costs and large set-asides for future loan losses, reports issued Tuesday showed.

The hefty loan-loss provisions reflect “increasing concerns about the domestic and international economies,” according to Alfred Brittain III, chairman of Bankers Trust New York, the nation’s ninth-largest banking firm.

Banks were hurt last year by weakness in a number of sectors of the U.S. economy, particularly energy, real estate, agriculture and manufacturing. The continuing slump in the Third World, notably in Africa and Latin America, is putting added pressure on the banks’ balance sheets.

Adjustments forced by the 1986 tax reform law had mixed effects on major banks: Some took sizable writeoffs in anticipation of higher future tax bills, while others seized the opportunity to reduce their immediate tax burdens under the old law.

On the expense side of the ledger, results were disappointing in light of most bank companies’ avowed determination to restrain costs. But industry analysts attributed much of the expense growth to technology investments and the start-up costs of entering new lines of business.

California’s Security Pacific and Wells Fargo & Co. on Tuesday reported record profits for the year.

Security Pacific, the country’s sixth-largest banking firm, said it earned $385.9 million in 1986, a 19.5% increase over the $322.8 million reported for 1985. Income for the fourth quarter increased 21.4% to $104.6 million.

“Our continued growth is a direct result of our basic strategy of building diversified financial service businesses, and we will continue to strengthen Security Pacific by adding new markets and new businesses in the future,” Chairman Richard J. Flamson III said.

Security Pacific had year-end assets of $62.6 billion.

Wells Fargo posted 1986 profits of $273.5 million, a 44% increase over its 1985 net income of $190 million. The figures include income from its acquisition of Crocker National Corp. in June and reflect the speed with which it has been able to pull off the dramatic merger.

In the fourth quarter, San Francisco-based Wells Fargo, the nation’s 10th-largest bank holding company, had net income of $78.4 million, a 60% jump over the year-earlier period.

At year-end, Wells Fargo’s total assets were $44.6 billion.

Citicorp, the nation’s largest banking company, said it earned a record $306 million in the fourth quarter of 1986, up 26% from the same period a year earlier.

In 1986, Citicorp recorded more than $1 billion in annual profits, the first time a U.S. bank has passed that landmark. Despite huge increases in its credit losses and operating expenses, the New York giant posted profits of $1.06 billion, up 6% from its 1985 net of $998 million.

The company’s profit increase was driven by a jump in earnings from its consumer banking operations, which rose 49% in the fourth quarter. For the year, however, Citicorp wrote off $958 million in loans to consumers, an increase of $373 million.

Citicorp increased its year-end provision for loan losses by 37%, to $1.69 billion. Its operating expenses rose by 25%.

Citicorp’s total assets on Dec. 31 were $196.1 billion, up from $173.6 billion a year earlier.

Chase Manhattan, the nation’s third-largest banking company, reported a fourth-quarter profit of $157.8 million, compared to $150.7 million in the period a year ago. Full-year profit rose to $585.4 million, up 3.6% from $564.8 million in 1985.

Chase said it increased its loan-loss provision substantially in the fourth quarter and for the full year, largely because of higher levels of consumer loan charge-offs and uncertainty over loans to certain developing countries. The company’s total allowance for possible bad loans was $1.06 billion as of Dec. 31, compared to $908 billion a year earlier.

Chase had assets totaling $94.8 billion as of Dec. 31, up from $87.7 billion a year earlier.

Manufacturers Hanover, the country’s No. 4 bank holding company, posted fourth-quarter net income of $75.4 million, down 30% from the $108.3 million it earned in the fourth quarter of 1985. The bank said profits were down because it took a one-time after-tax charge of $33.5 million as a result of a buyback of $686 million of its high-yielding debt securities.

For the year, Manny Hanny’s profits were $377.2 million, down 7.5% from its 1985 net of $407.5 million.

The company’s loan-loss reserve grew to $1 billion on Dec. 31, compared to $813.8 million at the end of 1985.

Bankers Trust New York, the ninth-ranked bank holding company, reported fourth-quarter net income of $97.5 million, compared to $96.3 million a year earlier.

Fourth-quarter results were hampered by an unusually large loan-loss provision. The bank set aside $188 million for bad loans in the fourth quarter, more than four times the $45 million figure of a year earlier. Its total allowance for bad loans as of Dec. 31 was $590.7 million, or 2.21% of loans outstanding, compared to $427.6 million, or 1.73%, a year earlier.

Net income for the full year rose to $427.9 million, compared to $371.2 million in 1985.

Among other banks, 1986 profits at No. 14 Bank of Boston rose to $232.8 million from $173.8 million in 1985, while Houston’s Texas Commerce Bancshares’ full-year net income fell to $20 million from $53 million the previous year.

Dallas’ RepublicBank, another Texas bank hurt by the depression in the oil business, said its 1986 net income plunged to $54 million from $140.2 million in 1985.

Last month, Texas Commerce agreed to merge with Chemical New York, and RepublicBank said it would acquire InterFirst, a large, troubled Dallas banking firm.

InterFirst reported a net loss of $326.5 million for all of 1986, compared to net profits of $61.1 million in 1985. Its fourth-quarter loss was $49.6 million.