J. P. Morgan Hikes Reserves by $2 Billion to Cover Loans to Less Developed Countries

J. P. Morgan & Co. on Thursday said it will pump $2 billion into its loan-loss reserves, becoming the third major New York banking company this week to set aside a staggering amount of money to cover increasingly doubtful loans made to developing nations.

The move by J. P. Morgan, parent of Morgan Guaranty Trust Co., will result in a third-quarter loss of $1.8 billion, and an unspecified loss for the year. That is the second-largest quarterly loss ever for a bank, eclipsed only by a $2.6-billion quarterly shortfall posted by New York-based Citicorp in 1987, which also stemmed from problem loans to developing countries.

On Wednesday, Chase Manhattan Corp. increased its reserves by $1.15 billion, producing a $1.1-million loss for its third quarter. On Monday, Manufacturers Hanover Corp. added $950 million to its reserves, and it is expected to post a $750-million loss for the three-month period.

In setting aside reserves, a bank designates money to cover potential future losses on loans that have gone sour. Banks have been under increasing pressure the past few years to put aside reserves for loans made to developing nations, principally in Latin America, in the late 1970s and early 1980s amid growing signs that the debts never will be fully paid off.

Morgan’s move is the most dramatic yet by a big American bank to deal with those loans because it now has set aside money to cover all of its $3-billion portfolio of long- and medium-term loans to developing countries.

‘Implies Loans Worth Zero’

The move surprised industry executives and analysts because most banks have been expected to increase reserves only to close to 50% of their outstanding loans and because Latin American debt still trades in the secondary market, meaning that investors believe that it at least has some value.

“It implies that the loans are worth zero, but they clearly are worth more than zero,” said Jerry L. Jordan, senior vice president and chief economist at First Interstate Bancorp in Los Angeles.

The move likely reflects J. P. Morgan’s strong balance sheet, which allows the bank to make such a big addition to its reserves, and the company’s desire to put its problems with loans to developing countries behind it. Unlike both Chase and Manufacturers Hanover, J. P. Morgan said it has no plans to issue common stock to replenish its capital. J.P. Morgan has about $100 billion in assets, making it the nation’s third largest banking firm.

So far, only regional banks in the United States, such as Bank of Boston, have set aside reserves covering all of their loans to less developed countries. Most large banks have reserves totaling about 30% of their exposure, meaning they have 30 cents in reserves for every dollar they provided.

The move by Morgan, however, is likely to put pressure on other big banking organizations, including Chemical Bank, Citicorp, Bankers Trust and BankAmerica, to follow suit.

Pessimism Deepening

“It turns up the heat on all of them,” said James J. McDermott Jr., research director at Keefe, Bruyette & Woods Inc., a New York investment firm that specializes in bank stocks.

BankAmerica, parent of Bank of America, has reserves covering 37% of its $7.4 billon in long-term and medium-term loans to developing nations.

J. P. Morgan’s announcement reflects some of the deepest pessimism yet about whether the banks will recover much for their loans to developing nations.

“Economic and political problems have intensified in several countries where we have significant exposure,” said J. P. Morgan Chairman Lewis T. Preston in a prepared statement.

Preston also said the bank is concerned about the “rising expectations” of less developed countries in the wake of Treasury Secretary Nicholas Brady’s debt-reduction plan intended to provide relief to debtor nations.

J. P. Morgan’s developing nations loans are primarily to Mexico, Brazil, Argentina and Venezuela.

Overall, Third World nations are about $1 trillion in debt. Brazil this week missed a $1.6-billion interest payment on its commercial bank debt and Venezuela is more than $800 million past due on interest payments. Argentina is in arrears to its bank creditors by $4.4 billion and has said it cannot afford to service its $60 billion in debt.