Chase Will Add $1.6 Billion to Loan-Loss Reserves, Take $1.4-Billion Loss in Quarter

Chase Manhattan Corp. said Wednesday it will add $1.6 billion to reserves to cover questionable loans to developing countries, thus becoming the third leading bank to take such a step within the past week.

Chase, the third-largest U.S. banking company, said the increased reserve would give it a second-quarter loss of $1.4 billion and a loss of $840 million for the year.

Citicorp, parent of Citibank and the nation’s largest banking company, said last week it would set aside $3 billion because it did not believe the international debt crisis was likely to ease soon. The step brought predictions that the other largest U.S. banks would soon follow suit and, on Tuesday, Norwest Corp. of Minneapolis said it was adding $250 million to reserves to cover likely losses in its $650-million portfolio of loans to developing countries.

Chase’s second-quarter loss will be the second-largest ever for a U.S. banking concern, following only the $2.5-billion Citicorp loss that is expected this quarter. Chase has one of the largest portfolios of loans to developing countries, with about $6.7 billion outstanding.

In a statement issued Wednesday, Chase Manhattan’s chairman and chief executive, Willard C. Butcher, said the action was “appropriate” in light of Citicorp’s action and the suspension of interest payments earlier this year by the government of Brazil. He said the bank believes that a resolution of the debt crisis can be achieved “through continued cooperation of the international banking community, and not through any form of debt forgiveness.”

Butcher said the bank is “well positioned” to take the step, citing the underlying strength of its domestic and overseas banking businesses. He said the bank believes it will not have to increase reserves further to cover international debts and forecasts stronger earnings in 1988 and subsequent years.

Chase’s largest outstanding loans are to Brazil, $2.74 billion, or 2.9% of the total bank assets; Mexico, $1.64 billion, or 1.7% of total assets; Venezuela, $1.08 billion, or 1.1% of total assets, and Argentina, $960 million, or 1.0% of total assets.

The move gives Chase reserves equal to about 25% of its outstanding international loan portfolio. That is the about the same percentage as the reserve set last week by Citicorp, and bank analysts predicted that other major banks will set that figure as their target as well.

The addition of $1.6 billion will give Chase a total loan-loss reserve of $2.7 billion or about 4.1% of its total outstanding loans.

Chase said it plans to sell off assets worth between $200 million and $300 million within the next several quarters to help fortify its financial position. It did not identify those assets.

Some analysts have argued that with higher loan-loss reserves, the banks can become more aggressive in trying to force the debtor nations to pay their debts. Others, however, have argued that the reserves will give the banks the ability to offer more lenient terms to their overseas borrowers.

In an interview, Chase President Thomas G. Labrecque said he believes that while the trend to increasing the reserves offers new hope for a solution to the crisis, he does not expect an easing of terms. “I think it will lead the countries to work out better plans for a solution of the problems, but I don’t think it will mean greater leniency,” he said.

The action was made after a vote by Chase’s board of directors and was announced after the close of the securities markets for the day. The board voted to maintain the bank’s quarterly dividend of 51.25 cents a share.

Richard Samartino, an analyst with Argus Research in Manhattan, said the action was “about what you’d expect after Citicorp’s action. They’re bracing themselves for a long, hard negotiation over these debts.”

He said Chase had been among the most likely candidates to quickly follow Citicorp because it has large outstanding loans to Third World countries but also has the financial stability to sustain a loss.

Samartino predicted that investors may even bid up Chase’s stock as they did last week with Citicorp’s following its announcement.

Analysts said Chase’s move would add to the pressure on other banks to increase their reserves. But they said some banks with large portfolios of loans to developing nations--notably Bank of America and Manufacturers Hanover Trust--are unlikely to do so because they could not sustain the resulting losses.

Analysts say several factors have combined to persuade the so-called money center banks to begin increasing the reserves. Brazil’s move was coupled with sluggish world economic growth, which increased the bankers’ doubts that the debts could ever be fully repaid.