Chase Manhattan Ups Reserves for Loan Losses by $1.15 Billion
Chase Manhattan Corp., the nation’s second-largest bank holding company, announced Wednesday a series of bold steps to improve its balance sheet, including a $1.15-billion increase in reserves to cover potential losses on loans outstanding to developing countries.
The increase, which adds about 50% to Chase’s loan-loss reserves, is part of a package of steps that will result in a $1.26-billion after-tax charge against the company’s third-quarter earnings. The charge is expected to leave Chase with a net loss for the quarter of about $1.115 billion, contrasted with net income of $283 million in the year-ago quarter.
But securities analysts strongly endorsed the move and said the steps will lead to improved earnings.
In an effort to bolster its capital, Chase also said it plans to raise $500 million by offering additional shares of its common stock. In addition, Chase said that through “liberalization” of its current dividend reinvestment and stock purchase plans, it would also add about $75 million annually to capital. The additional shares will substantially dilute current shareholders’ equity. Chase has 90.2 million shares outstanding.
Would End Quarterly Provisions
The stock market, however, reacted favorably Wednesday to word of an impending announcement by Chase, and the analysts predicted a further rise today. In trading on the New York Stock Exchange, Chase’s stock rose $1.625 a share to close at $39.50.
In a written statement, Chase said the increased loan-loss reserves would lead to improved earnings in future quarters because it will eliminate quarterly provisions for possible loan losses to developing countries. Chase also said that in future years the loan-loss provision combined with other existing but unused tax benefits will give it a tax savings totaling about $583 million.
Chase’s announcement followed word on Monday that Manufacturers Hanover Corp. had increased its loan-loss reserves by $950 million and also taken steps to boost capital, in part by selling a stake in a subsidiary to the Japanese Dai-Ichi Kangyo Bank Ltd. for $1.28 billion.
Analysts said the moves by Manufacturers Hanover and Chase this week reflect two factors. One is the Brady Plan for reducing Third World debt, combined with indications that more debtor countries will default on their obligations.
Under the Brady Plan, major banks are being strongly pressured to recognize more losses. The other factor is that major banks are now in a much better position than they were several years ago to write off more Third World loan losses. This is because of better retained earnings and successful diversification into new businesses such as merchant banking.
Other Writedowns
Banks also are under pressure to increase capital because of anticipated losses on loans to Third World countries.
In addition to Chase’s added provision for loan losses, the company said the $1.26-billion charge in the third quarter will include an $85-million writedown of problem real estate assets at the company’s Arizona subsidiary and a $25-million charge covering the scrapping of several unprofitable securities trading operations.
Chase said it will discontinue market making in British government-backed securities known as gilts, and Euro-convertible securities and U.S. mortgage-backed securities. Chase also said it will reduce its activities in the U.S. government securities market and will limit its secondary market trading of Eurobonds and other European securities to those denominated in dollars or British sterling.
The company said that at the same time it will step up other profitable securities trading operations and branch out into areas newly permitted to banks by the Federal Reserve. In a statement, Chase said it suffered an after-tax loss of $25 million from securities trading in the first half of 1989.
In the statement, Chase Chairman Willard C. Butcher said: “These special provisions clearly strengthen both the financial position and the earnings potential of the corporation.”
Claire M. Percarpio, an analyst at Duff & Phelps Inc. in Chicago, an independent research firm, concurred. In a telephone interview, she said: “The market liked Manufacturers Hanover’s announcement. They’re likely to like Chase’s also.” She added: “It enables Chase to move forward as a much stronger company.”
Took Losses Now
Percarpio said that by raising $500 million through the sale of additional shares, Chase will be able to avoid having to raise capital through the sale of assets.
James J. McDermott Jr., an analyst at Keefe, Bruyette & Woods in New York, an investment banking firm, said the moves will eliminate the key problem areas at Chase that have been a drag on earnings. He called the measures “a significant step.” McDermott said, “They took their hit (against earnings) now,” instead of continuing piecemeal charges each quarter for incremental increases in loan-loss reserves and for losses on securities trading.
The provision for possible Third World loan losses will boost Chase’s total reserves for loan losses to about $3.7 billion. The new provision means that Chase’s reserves now cover 46% of the company’s $6.2 billion of medium- and long-term loans to developing countries that are having trouble paying off their debt.
