B of A, 2 Other Big Banks Reclassify Brazil Loans; Moves Will Slash Profits
BankAmerica said Wednesday it has placed $1.9 billion in loans to Brazil on non-accrual status, a move that will cut its first-quarter profit by $40 million and threatens to wipe out nearly all of its potential 1987 earnings.
J. P. Morgan & Co., the New York-based parent of Morgan Guaranty Trust, the nation’s fifth-largest bank, announced moments later that it was taking the same step on $1.3 billion in long- and medium-term loans to Brazil. Morgan said the move would cost it $20 million in first-quarter earnings, an amount that would not seriously damage the company.
Manufacturers Hanover, the nation’s fourth-largest banking firm, also reclassified $1.4 billion in loans to Brazil, reducing its first-quarter profit by $18 million.
All three institutions said they expected Brazil to reach a debt refinancing with the banks and interest payments to resume at some point.
Interest Payments Halted
The actions by BankAmerica, Morgan and Manufacturers Hanover were triggered by Brazil’s announcement on Feb. 20 that it was indefinitely suspending interest payments on $68 billion of its foreign bank debt. Brazil’s total foreign debt is $108 billion, the largest in the developing world.
Most major U.S. banks that are owed money by Brazil probably will take similar steps in the next few weeks as they prepare their first-quarter earnings statements, analysts said. The actions are likely to depress bank stocks and put added pressure on the banks, Brazil and the U.S. government to move toward a quick resolution of the crisis.
In a related development, New York’s Citicorp, which leads the group of banks that negotiates with Brazil, said Wednesday that Brazilian Central Bank President Francisco Gros would meet bank creditors in New York on April 10 to discuss the loan impasse. The sessio1847616101the first since the interest moratorium was declared.
No agenda or timetable was set, however, and most observers expect the talks to continue for months.
Banks are required to put loans on a non-accrual, or “cash,” basis if no interest payments are received for 90 days.
When loans are placed on non-accrual status, income from them is recorded on the books only when the money actually is paid. On the normal accrual basis, interest is added when it is due, regardless of whether it is actually received.
All of the nation’s biggest banks have substantial exposure in Brazil, but the potential effect on earnings varies widely, according to an analysis by George M. Salem, who follows banks for the Wall Street investment firm Donaldson, Lufkin & Jenrette.
A yearlong suspension of interest payments from Brazil could cost BankAmerica nearly 100% of its expected profits in 1987, Salem figured, while earnings of its major California competitors--First Interstate Bancorp, Security Pacific and Wells Fargo & Co.--would be cut by only about 5%.
Morgan’s profits would dip 8%, while New York’s Citicorp, Chase Manhattan and Manufacturers Hanover could lose 17% to 20% of 1987 earnings.
A more likely outcome, according to banking analyst Raphael Soifer of Brown Bros., Harriman & Co. in New York, is that an agreement will be reached that will reschedule most of Brazil’s loans and result in limited losses to the banks.
“Some of the more optimistic analysts out there expect a settlement that would allow the banks to put all of this income back in before the year is out. I don’t think so, but I do think that whatever settlement is reached will allow them to put some of the income back,” Soifer said.
If the suspension lasts until the end of the year, BankAmerica said Wednesday, its earnings will be cut by $140 million--a figure almost equal to most analysts’ estimates of the company’s potential full-year profit.
Brazil thus threatens to mock BankAmerica Chairman A. W. Clausen’s pledge to return the troubled banking company to profitability. BankAmerica, parent of San Francisco’s Bank of America, lost $518 million last year, largely because of bad loans in agriculture, energy, real estate and the Third World.
Clausen said Wednesday, however, that BankAmerica believes that the banks and Brazil would reach an agreement that would provide for the payment of the suspended interest.
“Negotiations will be complicated and lengthy, but we continue to expect that a rescheduling agreement will be completed this year,” Clausen said in a statement. “For the interim period, however, we concluded that the responsible procedure would be to record income only as we receive payments on these loans.”
BankAmerica also said Wednesday that it was placing about $180 million of loans to Ecuador on non-accrual status, an action expected to reduce first-quarter earnings by an additional $5 million. If Ecuador, which is still digging out of last month’s severe earthquake, does not resume interest payments this year, BankAmerica’s profits will be cut by $10 million more.
Nevertheless, Clausen said that “barring substantially increased instabilities in developing countries,” BankAmerica expects to realize an operating profit in 1987.
BANKS’ VULNERABILITY
Loans to Estimated cut in earnings Brazil, in if suspension remains Bank billions in effect to year-end Citicorp $4.56 17.9% BankAmerica $2.74 93.3% Chase Manhattan $2.74 19.7% Mfrs. Hanover $2.32 17.5% J.P. Morgan $1.93 8.1% Chemical $1.47 14.6% Bankers Trust $0.85 4.5% First Chicago $0.73 7.6% Security Pacific $0.61 5.3% Wells Fargo $0.59 6.4% First Interstate $0.50 5.5%
Source: Donaldson, Lufkin & Jenrette
