Wells Fargo Is First to Erase Bad LDC Loans : Writeoffs, Discount Sales Clear Books; Cost Is High
Wells Fargo & Co. has become the first of the nation’s major banks to eliminate its troubled loans to less developed countries.
The San Francisco-based banking company’s announcement came Tuesday in its earnings report for the first quarter, which showed an 18% increase in profits over the same period a year ago.
Four other big banks reported strong first-quarter profits Tuesday, with New York-based Citicorp leading the way by posting a profit of $529 million, a gain of 48% over a year ago.
In addition, New York’s Bankers Trust said its profit for the quarter was up 30%, and two banks on the mend, Continental in Chicago and Mellon in Pittsburgh, posted good performances.
Wells Fargo began whittling down its LDC loan exposure last year by a combination of selling off loans at a discount and writing off others as losses. The bank said Tuesday that it eliminated the last $245 million in medium-term and long-term LDC debt during the first quarter.
The cost of selling loans and writing them off was high--$196.5 million was charged against loan-loss reserves in the first quarter. But the only loans to developing countries now on the bank’s books are short-term debt that is considered much safer.
Focusing on State
While some other major banks, including Los Angeles-based Security Pacific and First Interstate, have been paring down their LDC debt substantially, Wells Fargo is the first to get rid of it altogether.
The move is an integral part of the effort at Wells Fargo to withdraw from the international arena to concentrate on California. Because it will give the company a cleaner balance sheet, it is also expected to make the its stock more attractive to investors.
Wells, the nation’s 10th-largest banking company, was able to improve its profit for the quarter despite the big charge-offs for erasing the LDC loans.
A big jump in net interest income as a result of a higher net interest spread--the difference between rates on interest earned on loans and those on interest paid on deposits--helped Wells Fargo post a profit of $141.5 million in the period. That compared to $120.4 million in the first quarter of 1988 and to $136 million in the fourth quarter.
The bank’s return on assets and return on equity, two key measures of performance, also improved compared to the same quarter in 1988. The ROA rose to 1.23% from 1.10% and ROE was up to 24.52% from 24.18% a year ago.
Elimination of the LDC loans enabled the bank to cut its total non-performing loans substantially from a year ago despite an increase in troubled loans for real estate construction.
The bank said real estate construction loans listed as 90 days or more past due rose to $235 million in the first quarter from $91.7 million in the same quarter of 1988 and $173.7 million in the fourth quarter of last year.
Division Up Sharply
But Dan B. Williams, an industry analyst in the San Francisco office of Sutro & Co., a regional brokerage, said the percentage of non-performing loans in the bank’s total portfolio is “not enough to keep you awake at night.”
Citicorp, the nation’s biggest banking company, said the strong performance of its individual bank division helped boost profits for the first quarter to $529 million, by far the highest among U.S. banks. The division, which includes the company’s consumer and credit card operations, posted a 28% increase in income.
Citicorp’s earnings included a one-time gain of $77 million in the sale of its building in Tokyo. The bank is moving its expanding Japanese operations to a new center in 1992.
ROA at Citicorp was 1.01% for the quarter, up from 0.70% a year earlier, and ROE rose to 24.2% from 22.75%.
Unlike Wells Fargo, however, Citicorp retains a heavy burden of LDC debt. The bank said its outstanding loans to developing countries were $9.3 billion at the end of the quarter, down from $9.5 billion at the end of the year.
Bankers Trust, the nation’s ninth-largest banking company, said first-quarter profit of $164.3 million was up primarily as a result of increased non-interest revenue from its trading activities and fees from trust and custodial accounts.
The nation’s 14th-largest banking company, Continental Bank, continued to show a strong performance. Earnings for the quarter were a record $76 million, up 10% over the same period a year ago.
The bank, which has scaled down to concentrate on commercial banking, said expenses for staff and other costs declined over the past 12 months, chiefly as a result of the elimination of nearly 1,500 jobs.
At Mellon Bank, profit was $53 million for the quarter, compared to $25 million in the first quarter of 1988 and $48 million in the last quarter of 1988. In addition, the bank reported a one-time gain of $24 million from its capital refinancing program.
Compared to the same quarter of last year, the 16th-largest bank reported increases in net interest income and service fees and decreases in operating expenses and provisions for loan losses.