Result of Boosts in Bad-Loan Reserves : Chemical, Mellon Go Steeply in the Red
Chemical New York Corp. and Mellon Bank Corp. on Tuesday became the latest of the major bank holding companies to report steep second-quarter losses as a result of their decision to increase loan-loss reserves to cover troubled Third World loans.
Chemical, the nation’s seventh-largest bank holding company, said it lost $1.10 billion in the three months ended June 30, compared to earnings of $98 million in the year-ago quarter.
The company had posted a loan-loss provision of $1.19 billion for the latest quarter.
Pittsburgh-based Mellon, which added $415 million to its loan-loss reserve, said it lost $566 million in the period ended June 30. That compared to net income of $55 million in the year-ago quarter.
By sharply boosting reserves, banks reduce their current earnings but establish a cushion to protect future earnings from loans that must be written off or disposed of at a loss.
The banks have cited the decision by Brazil, the developing world’s biggest debtor, to halt interest payments on its international bank debt in February, troubled Third World economies and a series of debt restructurings as reasons for the reserves.
Chemical said its second-quarter net interest income, excluding the loan provision, rose to $490 million from $429 million, while non-interest income increased to $272 million from $207 million. Non-interest operating expenses rose to $583 million from $407 million.
Six-Month Loss
The results include the May 1 merger with Texas Commerce Bankshares Inc., Chemical said.
For the first six months of this year, Chemical lost $1.01 billion compared to a net profit of $201 million in 1986.
Mellon’s second-quarter net interest income fell to $640.57 million from $706.32 million, while non-interest income dipped to $149.47 million from $191.77 million. Non-interest operating expenses rose to $382.96 million from $280.20 million.
Tuesday’s announced loss follows a first-quarter shortfall of $60 million, the first in the 118-year history of the 12th-largest bank holding company.
For the first six months of this year, Mellon had a net loss of $626 million compared to a $115 million profit for the first six months of 1986.
Despite the loss, Mellon Chairman Frank V. Cahouet said, “I am very confident about our future.”
Mellon spokesman Barry I. Deutsch added that the company could return to profitability next year.
Besides covering Third World debt, Mellon said, the increase to its reserve also covered “losses that are expected to result from the continuing deterioration in the quality of loans to residential real estate developers in the Texas and Colorado markets.”
The second-quarter results also reflected losses relating to Mellon’s mortgage banking subsidiaries and acquired real estate, accruals for severance expense, an early retirement program and a delay in recognizing a gain on the sale of Mellon’s interest in Network Finance Limited.
