Many major U.S. banks will sacrifice profits in their soon-to-be-released financial statements to build up reserves for bad loans, analysts and bankers said yesterday.
At the same time, the bankers and analysts said they do not expect any other major banks to report major or unexpected loan losses in the third quarter, as First Chicago Corp. announced Wednesday it would do.
Barry Sullivan, chairman of First Chicago, told securities analysts in New York yesterday that 10 loans accounted for two-thirds of the losses and seven of them were big credits in which a number of major banks participated. He indicated that other banks might be forced to write-down the value of their stake in those loans.
But well-informed banking sources said examiners from the Office of the Comptroller of the Currency have recently studied most major banks in the same kind of examination that triggered the First Chicago move. These sources said most other major banks had been quicker than First Chicago to recognize that the loans should be written down to less than their face value.
The anticipated increases in loan loss reserves reflect not so much the surety of writeoffs that First Chicago faces but an increasingly conservative posture on the part of the banks, according to a key officer at a major multinational bank.
He said that the severe recession, volatile interest rates and continuing international lending problems have convinced bankers that they need a higher level of loan loss reserves than they thought necessary a few years ago.
Regulators also have been concerned about the level of bank loss reserves and capital, and also have been growing more stringent about loan quality in their examinations of banks, especially of big multinational banks.
The Federal Deposit Insurance Corp. is considering whether to require banks to maintain capital equivalent to 9 percent of their assets -- a 50 percent increase over current requirements. Capital is the reserve into which banks can dip to cover unexpected losses.
First Chicago, the nation's 10th-biggest bank company, announced Wednesday that it expected loan losses of $279 million in the quarter that ended Sunday; as a result, it said it would report a net loss of between $70 million and $74 million for the third quarter. In the second quarter, the bank had loan losses of $45.7 million.
First Chicago Chairman Barry Sullivan said the bank company, with assets of $38 billion, would add $308 million to its loan loss reserves. The provision would cover not only the $279 million in losses, but also would add $29 million to the reserve. Sullivan said the charge was a one-time occurrence and that the bank would return to its second-quarter level of profitability in the final three months of 1984.
Analysts and other bankers said the First Chicago announcement came as a complete surprise. Banking sources said First Chicago took the heavy losses under pressure from the Office of the Comptroller of the Currency, which regulates nationally chartered banks.
Sources close to the First Chicago situation said bank management had been "slow" to recognize the deterioration in a number of major loans -- most of them in energy, agriculture and shipping.
First Chicago depositors, however, reacted calmly to the report of the projected third-quarter loss. Douglas Ledwith, chief financial officer of American Security Bank, said First Chicago had no difficulty obtaining the funds it needs to operate either Wednesday or Thursday.
Continental Illinois National Bank, until recently the nation's eighth-biggest bank, failed for all practical purposes last May after jittery depositors launched the biggest run in history. Continental was riddled with problem loans, and in the two years following the revelation that it bought $1 billion in bad energy loans from Oklahoma City's Penn Square National Bank, Continental's problem loan situation worsened rather than improved.
Continental ultimately was saved by bank regulators in what has been the biggest business rescue in history.
Banking analysts said yesterday that they were willing to give First Chicago the benefit of the doubt and accept Sullivan's contention that the loss is a one-time event. But they cautioned that if the big bank continues to show problems in coming quarters, First Chicago will have problems attracting deposits.
"The $64,000 Question is why it took First Chicago management so long" to recognize the bad loans, according to James McDermott, the chief banking analyst for the Wall Street firm Keefe Bruyette & Woods. He noted that the areas in which First Chicago reported the heavy losses -- energy, agriculture and shipping -- have been problem industries for several years and that the loans should have been scrutinized carefully, especially in light of what happened to Continental.