Banks’ Second-Quarter Profits Should Be Big Improvement Over ’87

NEW YORK — In contrast with their disastrous second quarter last year, U.S. banks are expected to report respectable profits for the 1988 April-June period.

Their operating earnings, however, should remain flat in comparison to the first quarter, when the banks benefited from big trading revenue, analysts say.

“Earnings will be down from the first quarter, which I attribute to the lack of trading opportunities in the period,” said James McDermott with Keefe, Bruyette & Woods Inc.

“Net interest income was flattish, not much growth,” said Art Soter with Morgan Stanley & Co., reflecting the continuing weakness in the banks’ traditional lending business.

Overall, however, the outlook for banks is better than it was a year ago, when they posted staggering losses after shoring up their reserves for risky Third World loans.

The banks’ stalemate with Brazil--the primary cause for the huge additions to loan-loss reserves last year--appears partly resolved. The top lenders to Brazil recently concluded a preliminary debt rescheduling agreement with Brazil, eliciting a pledge from Brasilia to resume regular interest payments on its commercial debt. U.S. banks have $25 billion in outstanding Brazilian loans.

‘Good Expense Control’

And Argentina, which stopped paying interest in late March, said last week that it had started making payments to its biggest creditors.

In addition, U.S. banks have proceeded with their cost-cutting efforts and kept a lid on expenses. “There was good expense control,” said Brent Erensel with Donaldson Lufkin & Jenrette. “Expenses will be up 4% on average, which is pretty good.”

Expenses at J. P. Morgan Co., the most profitable of the big banking companies, are likely to have declined in the second quarter, said Chris Kotowski of Oppenheimer & Co.

“Non-interest income and trading will probably be off (on average) from the first quarter,” said Morgan Stanley’s Soter. That is a bad sign because banks have increasingly turned to trading and fees from non-traditional businesses to augment their profits.

Asset Sales Help

“Fee income is still pretty good, but it is slowing down,” said Lawrence Cohn of Merrill Lynch & Co. “The higher the stock market goes, the harder it is for banks to fund acquisitions. And there are fewer leveraged buyouts.”

Past exploits, however, should boost many of the banks’ second-quarter figures. Chase Manhattan Corp. should post a $70-million gain from its investment in Cain Chemical Inc., which was taken private last year, Donaldson Lufkin’s Erensel said.

As in previous quarters, asset sales and tax benefits should help the quarterly performance of many banks.

“Manufacturers Hanover Corp. . . . has a $5.95-per-share gain from selling its consumer-finance unit,” said McDermott.

Chemical Banking Corp., based in New York, should reap a $10-million gain from tax benefits, said Erensel.

BankAmerica Corp. will have $17 million from tax benefits and a $46-million gain from a legal settlement, he said, adding that the San Francisco giant’s core earnings also have improved.