Big Year for Big Banks : Reduced Overhead, Third World Repayments Reverse Earnings Disaster of ’87
Security Pacific and Wells Fargo reported record profits Tuesday, reflecting tight expense control, increased income and big reductions in loans to Latin American countries.
The state’s second- and third-largest banks joined a growing list of big banks posting strong results both for the fourth quarter and for 1988 as a whole. Once overall final figures are compiled, the nation’s banks are expected to report the most profitable year ever after their provisions for troubled Third World loans created an earnings disaster in 1987.
Citicorp, the largest U.S. banking company, said Tuesday that its fourth-quarter earnings rose to $747 million from $621 million a year earlier. The New York bank’s earnings for 1988 were a record $1.86 billion, up from a loss of $1.1 billion in 1987.
J. P. Morgan, parent of Morgan Guaranty Trust of New York, said its fourth-quarter earnings were up 15.2% to $258.1 million and earnings for the year were $1 billion. On Monday, Chase Manhattan and Manufacturers Hanover also reported sharp increases in earnings for the quarter and the year.
At Los Angeles-based Security Pacific, the nation’s fifth-largest banking company, fourth-quarter profit was $169.5 million. The figure contrasted with a $39.4-million loss in the fourth quarter of 1987, which was caused by a special $350-million set-aside for Latin American debt. Excluding the special provision, 1987 fourth-quarter income would have been $156.9 million, the bank said.
‘A Landmark Year’
Like most other big banks, Security Pacific benefited from back-interest payments from Brazil, which contributed $58 million to its income in the quarter. Brazil had stopped paying interest on its loans to U.S. banks, but an accord reached last summer led to a resumption in the payments in return for new loans.
Security Pacific also reaped the benefits of improved earnings on its loans, tough efforts to control costs of staff and overhead, and a sharp reduction in outstanding loans to Latin American countries.
As a result, the company posted record earnings of $638.9 million for the year and its chairman and chief executive, Richard J. Flamson III, called 1988 “a landmark year.”
Security Pacific has suffered from double-digit increases in expenses in recent years, and Flamson promised shareholders last spring that growth would be kept below 5% in 1988. The bank said Tuesday that expenses were up 4.9% over the previous year, despite the acquisition of Hibernia Bank in Northern California.
One way the company kept expenses down was eliminating branches operated by its principal subsidiary, Security Pacific National Bank. The Los Angeles-based unit closed 65 branches in 1988, although opening some new offices and adding Hibernia resulted in a net reduction of only 40 branches.
The bank’s aggressive effort to reduce its loans to lesser-developed countries brought the total to $520 million at year’s end, compared to $1.82 billion a year earlier.
Increased Staff Costs
Troubled domestic loans declined slightly in 1988 despite problems at the company’s Arizona subsidiary, Security Pacific Bank Arizona. Troubled real estate loans at the Arizona bank rose nearly $100 million, reflecting economic difficulties in the state, the bank said. But Security Pacific said improvements at other units meant that bad domestic loans were down to $1.2 billion from $1.23 billion at the end of 1987.
The earnings improvement was reflected in two key measures of bank operations, return on equity (ROE) and return on assets (ROA). ROE rose to 18.9% from 16% the year before and ROA was up to 0.84% from 0.71%. The 1987 figures were adjusted to remove the effects of the special provisions for loans to the Third World.
Security Pacific still trailed Wells Fargo, the state’s most efficient big bank, in those two areas.
Wells Fargo, the nation’s 10th-largest banking company, said its ROE for 1988 was 23.99%, up from an adjusted figure of 17.39% in 1987, and that ROA was 1.14%, up from 0.85%. The sharp improvements were the result of record earnings for the year of $512.5 million at the San Francisco bank.
Net income for the fourth quarter was $136 million at Wells, up 22% from $111.2 million a year ago. The bank reported strong gains in net interest income, the difference between what it charges customers for loans and what it pays for deposits, and in fee income.
Staff and overhead costs at Wells Fargo were $381.8 million for the quarter, up slightly from $370.6 million in the same period a year earlier. The increase reflected the acquisition of Barclays Bank of California in 1988. The bank said total expenses for the year were $1.5 billion, the same as 1987.
Wells Fargo slashed its exposure to Latin American countries by selling loans at a heavy discount. The bank reduced its total loans to lesser-developed countries to $245 million from $1.4 billion over the year.
Wells Fargo has the highest relative exposure of any big bank to loans for leveraged buyouts as well as heavy exposure to real estate construction lending, factors that have caused concern among some analysts.
The year-end report showed no signs of trouble in either area, however, and Wells Fargo officials have said consistently that they are confident about their ability to withstand problems in real estate or with highly leveraged companies.
Unlike most big banks, Wells Fargo received little back interest from Brazil. The total, $5.8 million, was used to reduce the principal on its outstanding loans to the country, rather than counted as income.
Citicorp’s earnings got a big boost from $436 million in back interest payments from Brazil, which help make up for what the bank said were weaker trading income and higher expenses. Citicorp cut its loans to lesser-developed countries by $1.2 billion in 1988, leaving a total of $12.1 billion at year’s end.
At Morgan Guaranty, back interest from Brazil contributed $240 million to net income for the fourth quarter and helped push the year’s earnings to $1 billion. Morgan said its total loans to the Third World dropped $800 million in 1988 to $4.6 billion.