Security Pacific to Boost Bad-Loan Reserves, Take Loss for Second Quarter
Joining the list of major banks that are bracing for a worsening in the Latin American debt crisis, Security Pacific Corp. said Monday that it is adding $500 million to its reserves to cover possible bad debts from developing countries.
The $500-million charge against earnings will result in a $175-million loss in the second quarter, the first loss that the nation’s sixth-largest bank holding company has reported in more than a decade. In the second quarter last year, Security Pacific posted earnings of $93.5 million.
Despite the quarterly loss, the Los Angeles banking company said it expects to earn about $150 million for all of 1987, compared to $385.9 million last year.
New York’s Citicorp was the first to increase its loan-loss reserves, fattening its fund by $3 billion last month. The nation’s largest bank holding company said the decision “resulted from a broad review of global economic trends and their potential impact on Citicorp’s major customers.” Only a month before, Brazil had suspended interest payments on its debt.
‘Relatively Small’ Exposure
Citicorp’s move was soon followed by Norwest Corp. of Minneapolis, which added $250 million to reserves, and Chase Manhattan of New York, which increased its reserves by $1.6 billion. Many smaller regional banks have set aside reserves for their Latin American debt, including Rainier Bancorp. of Seattle, which on Monday announced that it would add $58 million to its reserve for possible credit losses to developing countries.
Security Pacific Chairman and Chief Executive Richard J. Flamson III noted that the bank’s exposure to losses on loans to lesser developed countries (LDCs) is “relatively small.” But he added that the company increased its loan-loss reserve because “we think that the LDC debt environment has been altered significantly given the recent actions by other major financial institutions.”
“The fact that we can accomplish this $500-million charge against earnings and still expect a profit of approximately $150 million for the year is a clear testimonial to the strength of our diversified sources of earnings,” Flamson said. “We are well positioned to take this action.”
The $500-million addition will raise Security Pacific’s reserve for loan losses to developing countries to about $650 million, or roughly one-third of the bank’s nearly $1.9 billion in loans to such countries, a Security Pacific spokeswoman said. Security Pacific’s total reserves for credit losses will rise to $1.3 billion, or about 2.8% of the bank’s $44.4 billion of total loans and leases outstanding.
Exceeds Minumum Requirements
After the addition, Security Pacific’s ratio of primary capital to total assets at the end of the second quarter will be 7.4%, which the company said is “well in excess of all U.S. regulatory requirements.”
Security Pacific said it has about $605 million in loans to Brazil and $570 million in loans to Mexico. The rest of the loans are distributed among various developing countries, the spokeswoman said.
Flamson stressed that Security Pacific is not writing off its loans to developing countries and expects that the move will give the company greater flexibility in dealing with the loans.
Analysts viewed the increase in loan-loss reserves as a generally positive move.
“It’s their effort to improve the credibility of their balance sheet and income statement going forward,” said Donald K. Crowley, a senior vice president in the San Francisco office of Keefe, Bruyette & Woods. “Security clearly is in a better position than a lot of banks to step up and do this.”
“It’s a protective measure on the part of Security,” said Dan B. Williams, a banking industry analyst with Sutro & Co. in San Francisco. “It would avoid unexpected damage to future earnings.
“In a sense, Security is taking advantage of an atmosphere now that has been created by Citicorp,” Williams said. “For some perverse reason . . . the market seems to like this thing.”
Citicorp’s stock, for example, has risen slightly more than 11% since its announcement, closing Monday at $56.375 a share on the New York Stock Exchange. Security Pacific, which made its announcement after the markets closed, saw its stock inch up 37.5 cents a share to close at $38.375 on the NYSE.
Security Pacific’s move could increase the pressure on other large banks such as Bank of America and Manufacturers Hanover, which have large loan exposure in Latin America and weaker earnings, to increase their loan-loss reserves, Williams said. But, he added, Bank of America had reserves equal to 3.16% of total loans on March 31, compared to Security Pacific’s 1.72%.
“If everything else were equal--and I would be the first to point out that everything is not equal--then Citicorp and Security Pacific and the others were lacking,” he said.
Crowley said: “Our feeling is that the major banks will probably give a split decision on these reserves against Latin America. It’s too early to say that they’re all going to do it.”
