5 major banks report higher earnings

January 20, 1993|By New York Times News Service

Five of the nation's 10 largest banks reported higher tha expected earnings yesterday, leading banking experts to say that the end is in sight for the banking industry's troubles with real estate loans.

The billions of dollars of loans, most of them made in the late 1980s for office buildings and other projects,had seemed so shaky just two years ago that government officials, bank executives and industry analysts had issued dire warnings.

They said the banking industry might be in danger of a rash of failures similar to those that had earlier plagued savings and loans, forcing a costly federal bailout.

Raphael Soifer, a banking analyst with Brown Brothers Harriman & Co., said the banking industry had grown healthier in the fourth quarter. "It's a direct function of the improving economy," he said.

Describing the quality of the loans the banks now carry on their books, John D. Leonard, a banking analyst for Salomon Brothers, said the situation had been "improving steadily since the early part of last year, but the magnitude of the improvement now surprised us."

The earnings reports released yesterday for Citicorp, Chemical, Chase Manhattan, Banc One and Wells Fargo & Co. were significant because they showed that the banks were reducing their troubled real estate loans faster than expected.

Particularly surprising was the announcement by Wells Fargo, based in San Francisco, which said its provision for bad loans was $300 million, down from $700 million a year earlier.

Analysts had expected an increase. Southern California, in particular, has been troubled for more than a year by a deeply depressed real estate market.

The bank earned $58 million, compared with a loss of $231 million a year earlier. Investors responded to the news by rushing to buy Wells Fargo shares, driving the company's stock price up $13 a share, or 15 percent, to $99.

Also contributing to improved earnings has been the low interest rates banks now pay on deposits and other sources of money, while still charging considerably higher interest rates for loans. Many banks have also significantly cut costs by merging with other banks, closing branches and laying off employees. Chemical Bank and Manufacturers Hanover merged in 1991.

Citicorp said it had cut costs $1.3 billion and reduced staff by 14,000 people in the last two years.

Citicorp said its earnings in the fourth quarter were $280 million, compared with a loss of $133 million in the quarter a year ago. Illustrating the trend at all of the banks, Citicorp said the amount of money it must set aside as reserves for bad loans fell to $778 million, from $962 million a year earlier.

Chemical said its earnings in the fourth quarter were $304 million, compared with a loss of $420 million a year earlier. The loss in 1991 resulted from a restructuring charge of $625 million when it merged with Manufacturer's Hanover.

Chase Manhattan earnings increased to $169 million from $135 million a year earlier.

Banc One, based in Columbus, Ohio, said its earnings increased to $193 million from $151 million a year earlier. The bank said its troubled loans were also down, to $629 million from $770 million a year earlier.

But the fact that the banks still must put aside hundreds of millions of dollars for expected problems illustrates that banks // must continue to cope with troubled real estate loans for years to come.

"Real estate would be scary if the economy ticks down again," Mr. Soifer said. Despite the Well Fargo earnings report, he said, "California hasn't bottomed out, but we can see the bottom now."

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