BankAmerica Corp., already hobbled by two years of massive losses, announced Monday that it is setting aside $1.1 billion for possible future losses on loans to troubled Third World borrowers. As a result, the San Francisco banking company will post a second-quarter loss of $1 billion.
The move effectively delays for at least a year the return to profitability promised by Chief Executive A. W. Clausen when he returned to the bank last fall. Although the bank did not release an estimate of its full-year losses, outside analysts said the company would probably record a net loss in 1987 of about $800 million.
This year's loss follows deficits in 1985 and 1986 totaling $855 million, which left BankAmerica, once the nation's largest banking firm, crippled. Over the past two years, the company suspended its common stock dividend, sold nearly 20% of its assets, changed its entire top management team and fought off an unwelcome takeover attempt by Los Angeles' First Interstate Bancorp.
The bank took the move reluctantly after a special meeting of its board of directors Monday. Clausen said just 10 days ago that he believed the bank's bad-loan reserve was "adequate" but that the company might be forced to raise it to counter a widespread "perception" that it was too small.
The huge second-quarter loss will bring new pressure on BankAmerica, parent of Bank of America, to strengthen its underlying capital base. The company's common shareholders' equity is now a tenuous 2.3% of the bank's total $99 billion in assets, a ratio that BankAmerica will try to improve by disposing of additional assets or selling new securities, perhaps to a group of Japanese banks.
Clausen was in Japan last week to meet with leaders of that country's largest banks. Although the bank would not discuss the subject of the meetings, reliable Japanese newspapers said Clausen was seeking commitments from the Japanese to buy $300 million in new BankAmerica securities.
Repayment in Doubt
With this action, BankAmerica is recognizing that a sizable proportion of its $10 billion in loans to developing countries will never be repaid. Clausen said the move will strengthen BankAmerica's hand in negotiating with foreign borrowers and improve the bank's ability to withstand future shocks.
The addition to the loan-loss reserve essentially transfers money from one BankAmerica account to another and, while it will result in a large loss for the year, does not affect the safety of depositors' funds.
Major U.S. banks are following the lead set by New York's Citicorp, the nation's largest bank holding company, which set aside $3 billion for bad foreign loans last month. Citicorp said the action would result in a second-quarter loss of $2.5 billion and a loss for the year of $1 billion.
Over the past three weeks, several of the nation's largest banking firms, including Chase Manhattan Corp., Norwest Corp. in Minneapolis, Bank of Boston and Rainier Bancorporation in Seattle, followed Citicorp in boosting loan-loss reserves and announcing large quarterly losses. Seafirst Corp., a BankAmerica subsidiary in Seattle, said Monday that it is adding $60 million to its bad-loan account.
"These large increases in loan-loss reserves by major banks not only change the way developing-country debt is viewed but potentially will affect the dynamics of how this problem will be dealt with," Clausen said.
"This addition to our reserve will allow us to address the new uncertainties introduced by the changes in market perception and will strengthen our ability to help develop constructive solutions to the developing country debt situation."
The banks' actions mark a new chapter in the evolving Third World debt saga. The moves were prompted by Brazil's unilateral suspension of interest payments on $67 billion in foreign loans in February. Brazil, which is suffering an economic crisis and explosive inflation, said it will resume payments when it reaches an agreement with its 700 creditor banks that will lessen its debt-service burden.
Brazil's step forced the banks to abandon the fiction that their loans to the developing world were worth anything near face value. Third World debt generally sells for about 65 cents on the dollar in the secondary market, where loans are swapped between banks and third-party investors.
Proportion of Debt
Clausen said BankAmerica's loan-loss reserve now amounts to about 25% of the total amount owed by public and private borrowers in 45 developing countries. The 25% figure implicitly acknowledges that the bank's Third World loans are worth, in the aggregate, about 75 cents on the dollar.
That percentage matches Citicorp's but trails that of rival Security Pacific, which increased its reserve by $500 million last week, bringing its bad-loan cushion to 36% of its Third World exposure. Security Pacific, based in Los Angeles, said it would post a loss of $175 million in the second quarter but would record a full-year profit of $150 million.
The BankAmerica chief executive said that, to determine the size of its reserve, the bank conducted extensive analyses of the economic prospects of each of the 45 countries. It looked at the current level of reserves, the ability of each country to meet its interest payments, the mix of public and private borrowing and the potential value that the bank could realize by selling its loans to another bank or investor.
"BankAmerica's fundamental recovery should be basically unaffected by this action," Clausen asserted.
Analysts disagreed on that question. Donald K. Crowley, of the San Francisco office of the Wall Street investment firm of Keefe, Bruyette & Woods, said the action and the $1-billion figure were expected and would not change the bank's prospects.
"The functional effect on the company, at least initially, is not terribly important. It means a huge loss in the second quarter, but they'll have a lot of company" in the banking industry, Crowley said.
"We continue to expect them to be in the black in the second half (of the year). This does nothing to derail the basic trajectory," he added.
But another knowledgeable analyst said the erosion of BankAmerica's capital base means continued trouble for the firm for a long time to come.
"To the extent that they were in a weakened position already, it makes their position that much weaker. This isn't really news; it just gives official recognition to the fact that they're not worth what they've been maintaining," the analyst said.
He said BankAmerica's best hope now is to bring in Japanese investors by selling them stock and warrants as well as several of the bank's most profitable overseas branches. He said the Japanese might be willing to pay more than the current market value for such securities and assets as part of a long-term strategy to increase their presence in U.S. financial markets.