B of A’s Reluctant Decision : Steps That Led to the Boost in Loan-Loss Reserve

BankAmerica Chairman A. W. Clausen reluctantly decided to add $1.1 billion to the company’s reserve for foreign loan losses after it became clear that potential investors in the troubled concern expected BankAmerica to follow the lead set by Citicorp and other big banks.

“Most sophisticated investors assumed that all the major banks would make such moves--the only questions were ‘how much’ and ‘when,’ ” said Frank N. Newman, BankAmerica vice chairman and chief financial officer, in an interview Tuesday.

Still, Newman insisted that BankAmerica took the action “without pressure from any outside body”--including banking industry regulators and BankAmerica’s outside auditor, Ernst & Whinney.

Likely Reaction

Less than two weeks ago, Clausen told BankAmerica’s annual meeting that the company’s reserve was “adequate,” though he left open the possibility of raising it to counter what he called the “widespread perceptions” that it was too small.

Other major banking concerns, including Manufacturers Hanover Trust in New York, are now expected to fall into line.

“The action we took is in line with an industry trend” kicked off by Citicorp last month, Newman said.

BankAmerica, parent of Bank of America in California and Seafirst Bank in Washington state, announced late Monday that the special charge would result in a $1-billion net loss for the second quarter. The action will also lead to an unspecified deficit for all of 1987, BankAmerica’s third annual loss in a row.

Although Wall Street had greeted similar announcements by Citicorp, Chase Manhattan and Security Pacific in recent weeks by bidding up their stock prices, BankAmerica’s shares fell slightly on Tuesday, perhaps reflecting BankAmerica’s underlying weakness.

Book Value Slashed

BankAmerica common stock closed at $11.375, off 12.5 cents, on New York Stock Exchange composite trading of 662,300 shares.

Given BankAmerica’s recent troubles, the decision had a large effect on BankAmerica’s book value, or net worth. It was slashed by nearly one-third to about $15 a share from $22 a share.

Newman maintained that Monday’s decision was “totally unrelated” to Clausen’s visit to Japan last week. The trip--officially to commemorate the 40th anniversary of Bank of America’s Tokyo branch--also gave Clausen the opportunity to plead his case for new capital from Japanese investors.

BankAmerica filed a registration statement covering $1 billion in new securities earlier this year but has managed to sell only $100 million of that amount so far.

“One of the key things (potential investors) have asked about is the progress of our recovery program,” Newman said Tuesday. “We think it is pretty much on course. . . . Basically, our credit quality--outside of the lesser developed countries--has been improving.”

Analysts said the move should help the beleaguered institution attract needed capital. “Investors want cards on the table,” said Donald Crowley, who follows BankAmerica from New York-based Keefe, Bruyette & Woods’ office in San Francisco.

BankAmerica has about $10 billion in loans outstanding to public and private borrowers in 45 developing nations. Monday’s action boosts the reserve for possible losses on these loans to approximately $2.5 billion, implying that one dollar out of every four will eventually have to be written off.

BankAmerica’s action slashed its ratio of common equity to assets to about 2.3% from an already weak 3.4% at the end of the first quarter.

“Clearly, our equity capital is low, compared to what used to be the standard,” Newman said, adding that the banking concern’s primary capital ratio--which includes the loan loss reserve--remains the third highest among the nation’s 10 largest banking companies.

The High Price of Latin America Loans For Major U.S. Banks

U.S. banks have loaned a total of about $80-billion to Latin American governments and private firms. The bulk of the debt is in Mexico, Brazil, Venezuela and Argentina.

Mexico Total debt to U.S. banks: $23.7 billion

Citicorp $2.80 billion

BankAmerica $2.50 billion

Manufacturers Hanover $1.90 billion

Chase Manhattan $1.64 billion

Brazil Total debt to U.S. banks: $22.1 billion

Citicorp $4.60 billion

BankAmerica $2.74 billion

Chase Manhattan $2.74 billion

Manufacturers Hanover $2.32 billion

Argentina Total debt to U.S. banks: $8.5 billion

Manufacturers Hanover $1.46 billion

Citicorp $1.40 billion

Chase Manhattan $0.96 billion

J.P. Morgan & Co. $0.88 billion

Venezuela Total debt to U.S. banks: $9.4 billion

BankAmerica $1.26 billion

Chase Manhattan $1.08 billion

Manufacturers Hanover $1.01 billion

Citicorp $1.00 billion

Listed by country are total debt to U.S. banks as of September 30, 1986, and top 4 banks owed as of Dec. 31, 1986. Source: Salomon Bros.

U.S. Banks with Largest Latin American Loan Exposure (Estimated total Latin debt in billions of dollars)

Bank Debt Citicorp, New York $11.7 Manufacturers Hanover, New York 7.6 BankAmerica, San Francisco 7.3 Chase Manhattan, New York 7.0 Chemical, New York 5.3 J.P. Morgan & Co., New York 4.6 Bankers Trust, New York 3.2 First Chicago, Chicago 2.6 Continental Illinois, Chicago 1.8 Security Pacific, Los Angeles 1.8 Marine Midland, Buffalo, N.Y. 1.8 Wells Fargo, San Francisco 1.6 Irving Trust, New York 1.5 First Interstate, Los Angeles 1.5 Mellon Bank, Pittsburgh 1.4

Source: Keefe, Bruyette & Woods, Inc.