Massive Losses Reported by Security Pacific, Citicorp : Finance: California bank goes $508 million in red in quarter. New York firm loses a stunning $885 million.
Two of the nation’s biggest banks, Citicorp and Security Pacific Corp., reported huge third-quarter losses on Tuesday, reflecting in part the slow economic recovery and the difficulty in collecting on loans that financed real estate projects.
In New York, Citicorp’s stunning loss of $885 million was its second-worst ever. The loss by the nation’s biggest banking firm stems from a $930-million charge for massive restructuring, an increase in funds allocated for problem loans and the devaluing of assets. Chairman John S. Reed blamed “a difficult U.S. and global economic environment.”
Security Pacific’s $508.5-million loss, the bank’s largest, had been hinted at in August, when it was disclosed that the bank would be acquired by San Francisco-based BankAmerica Corp.
The loss partly reflects an extensive housecleaning undertaken by the nation’s fifth-largest bank in anticipation of that merger. But it serves as a jolting reminder of the deepening troubles that California banks face and the nagging sluggishness of the state economy.
Underscoring the bad times for California’s banks were announcements Tuesday by two other institutions, Wells Fargo & Co. and Union Bank, both based in San Francisco. Wells Fargo reported a 47% drop in profit, to $86 million, from year-earlier levels; Union, which is controlled by the Bank of Tokyo, posted a 86% drop in profit, to $5 million.
Next week, California’s fourth-largest banking firm, First Interstate Bancorp in Los Angeles, is expected to announce a $200-million loss stemming in part from problems with its California real estate loans.
The results reflect the increased problems for California banks growing out of the continued softness in the commercial real estate market. In many cities, one office in five is empty. Slack demand for new houses, retail space and industrial space also is making it harder to collect on loans. And the state’s 7.7% unemployment rate does not bode well for banks.
“The California economy appears to be lagging a very slow national economic recovery, and the timing and strength of recovery in California is uncertain,” Security Pacific chief executive Robert H. Smith said in a statement.
Despite Security Pacific’s hefty loss, both it and BankAmerica emphasized that their proposed merger, a swap of stock valued at $4.7 billion as of Tuesday, is still on track. Although strongly denied by both banks, rumors have circulated recently that problems lurking in Security Pacific’s loan portfolio may prompt BankAmerica to back out of the deal.
In August, the two banks had said that about $1 billion would be allocated for Security Pacific’s problem loans. The actual amount disclosed Tuesday was $1.2 billion.
In addition to the soft California economy, Security Pacific noted that it is suffering from the weak national economy as well as the soft commercial real estate market in Great Britain.
Citicorp’s loss shows widespread problems at the bank. A major part of the $930-million charge--$400 million--results from problems related to Citicorp’s ill-fated 1986 acquisition of Los Angeles-based Quotron, which provides stock price quotes and other data to securities brokers and traders.
Citicorp said it has also created a $320-million reserve to cover employee severance costs and the costs of closing various offices. Citicorp has cut its work force by more than 5,000 and has announced plans to reduce it by an additional 12,000 over the next several years.
Citicorp, the parent of Citibank, said it plans to suspend the quarterly dividend on its common stock, a step Security Pacific took as well. Security Pacific’s stock rose $1.375 to $32.50, but Citicorp’s fell 87.5 cents a share to $12.75.
In San Francisco, Wells Fargo, historically one of the nation’s most profitable banks, set aside $200 million for possible losses on its loans. It reported an increase in problems with construction and other real estate loans but fewer problems with loans that had been made to finance corporate buyouts.
Even so, the bank’s stock jumped $3.875 to $71.25, in part because some investors had expected problems to be worse.
Wells Fargo, the nation’s 12th-biggest bank, has been considered something of a bellwether on the severity of real estate problems for California banks because it is such a major real estate lender. Federal examiners will conduct a review its real estate loans this quarter. In a carefully worded statement, Wells Fargo cautioned that it may need to set aside more money for problem loans, given the uncertain economy.
Thaddeus W. Paluszek, a Kidder Peabody & Co. bank analyst, said that, although Wells Fargo is considered a better real estate lender than other banks, it will be difficult for the bank to avoid the fallout as real estate loans in California turn sour. “With such a large exposure, will they be able to maintain the quality of that portfolio? The economic reality is that the answer is no,” he said.
Not all banks and thrifts reported poor results. In Beverly Hills, Great Western Financial, the giant savings and loan, more than doubled its profit to $77.3 million, reflecting the big drop in the cost of the funds that the thrift lends to its customers.
Banc One Corp. of Columbus, Ohio, one of the nation’s top-performing banks, said its earnings climbed 23%. Chemical Banking Corp., which plans to merge with New York competitor Manufacturers Hanover, rebounded from a $43.7-million loss a year earlier to post a $131.6-million profit. Manufacturers Hanover’s $77-million profit was unchanged from a year earlier.
But several other major banks reported problems. In Chicago, First Chicago Corp.’s profit fell 32% to $24.6 million; in Atlanta, C&S;/Sovran, which is merging with NCNB Corp., posted a $50.8-million loss.
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