Citicorp May Classify Brazil Loans as Non-Performing; Financial Markets Shaken
Citicorp, the nation’s largest bank and the world’s biggest bank lender to Brazil, said Friday that it may be forced to declare $3.9 billion in Brazilian loans to be non-performing and that the action could cut annual profits by $190 million.
Citicorp’s announcement--and false rumors surrounding it--sent shudders through the stock and money markets as investors worried that the move signaled the long-feared financial crisis brought on by the inability of Third World countries to repay their debts.
Bank stocks fell sharply on the news from Citicorp but recovered later in the day as Citicorp spokesmen and banking industry specialists offered reassurances that huge bank losses are unlikely and that another stopgap solution will be found to the latest flare-up of the Third World debt problem.
Negotiating Tactic Seen
Some analysts described the Citicorp statement as a negotiating tactic designed to bring pressure on Brazil to resume interest payments. The bank has recently adopted a hard-line public stance toward Latin American debtors while quietly preparing to write off Latin loans by shoring up its reserves.
The moves are all part of the fallout from Brazil’s declaration Feb. 20 that it is indefinitely suspending interest payments on $68 billion in medium- and long-term loans from foreign banks and governments. It said it needs to renegotiate the terms of existing loans and to receive several billion dollars in new money to be able to deal with a widening domestic economic crisis.
Brazil’s total foreign debt is $109 billion, the largest of any developing country.
Federal Reserve Board Chairman Paul A. Volcker said in Los Angeles this week that talks between Brazil and its lenders aimed at ending the repayment moratorium would undoubtedly last more than 90 days. Banking regulations say that banks must declare any loans to be non-performing if interest payments have not been made for 90 days or more.
But Volcker indicated he does not believe that the moratorium will lead to large losses at U.S. banks. Brazil has said it will pay the overdue interest after debt-rescheduling talks conclude.
Citicorp’s announcement came in a filing with the Securities and Exchange Commission related to the proposed sale of $225 million in preferred stock. In such applications, a bank is required to report significant events affecting its business.
It said Brazil’s repayment moratorium “may require” the bank to place $3.9 billion in loans on a non-performing or “cash basis” status. Analysts define cash basis to mean that instead of accruing interest payments on the books when they are due, they are recorded only when they are actually received.
Brazil’s ‘High Confidence’
But Citicorp said it “believes that it is premature to make such a decision at this time, in view of the fluidity of the situation and management’s high confidence in the long-term outlook for Brazil.”
Citicorp has a total of $4.6 billion in loans to Brazil, as well as $1.6 billion owed in cruzados, the Brazilian currency, to Citicorp affiliates there. Analysts estimate that Citicorp earns 10% to 20% of its total profits in Brazil.
Spokesmen for several other major bank holding companies said Friday that a portion of their Brazilian portfolios might be affected by the moratorium. However, none indicated when it would consider declaring its Brazilian loans non-performing.
The Citicorp report touched off rumors that the banking company was writing off a large portion of its Latin America debt. Starting early Friday morning in London, investors began a large-scale selloff of stocks of banks with big Latin debt portfolios. Most affected were U.S. banks with the most to lose in Brazil--Citicorp, BankAmerica, Manufacturers Hanover and Chase Manhattan.
First Rumors, Then Calm
Investors also bid up the prices of U.S. Treasury bills as they fled to investments they felt offered haven in the event of an international banking crisis.
But everyone calmed down later in the day. The big bank stocks recovered and the money markets returned to normal. Citicorp common stock ended the day off 12 1/2 cents in composite trading on the New York Stock Exchange, after having been down $1.625 at one point.
“This is the most bizarre thing I ever heard,” said analyst Robert B. Albertson of the Wall Street firm of Smith Barney Harris Upham. “Citicorp just said the obvious. The possibility of losses is minuscule.” EXPOSURE TO BRAZIL
Loans As a Ten outstanding percentage largest as of of U.S. bank Sept. 30, 1986 shareholders companies (in millions) equity Citicorp $4,600 50.8% Chase Manhattan $2,800 57.3% BankAmerica $2,723 67.4% Manufacturers Hanover $2,300 61.1% J. P. Morgan $1,900 37.0% Chemical New York $1,425 45.7% Bankers Trust $875 32.2% Wells Fargo $621 26.5% Security Pacific $585 20.3% First Interstate $503 18.2%
Source: Donaldson, Lufkin & Jenrette Securities Corp.
