Commercial Banks' 2nd Quarter Worst in 50 Years after Writeoffs

By Skidmore, Dave | THE JOURNAL RECORD, September 16, 1987 | Go to article overview
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Commercial Banks' 2nd Quarter Worst in 50 Years after Writeoffs


Skidmore, Dave, THE JOURNAL RECORD


WASHINGTON - The nation's commerical banks suffered their worst quarter in more than half a century after writing off billions of dollars in Third World loans as uncollectible, the government said Tuesday.

The 13,937 banks insured by the Federal Deposit Insurance Corp. added $21.2 billion to reserves for bad loans in the second quarter of 1987, causing a $10.6 billion loss, the first reported since the Depression.

``It was clearly the worst quarter in the history of the industry since the FDIC began operating in 1934,'' FDIC Chairman L. William Seidman said.

The second quarter loss more than wiped out a record first quarter net income of $5.3 billion, posted after banks added $4.1 billion to loan loss reserves. The net loss for the first six months was $5.3 billion.

Seidman said he expected bank performance would turn around in the second half of the year. He predicted net income for the full year would be between $4.5 billion and $6 billion.

``Because of the loss reserves taken now, we would expect some improvement in the second half,'' he said. ``This quarter, hopefully, is the worst report we're likely to see.''

The huge loss in the second quarter had been expected. Major banks, including Citicorp, Chase Manhattan Corp., Security Pacific Corp. and BankAmerica Corp., had all announced in May that they were adding to reserves to cover Third World loans, particularly to Brazil which is refusing to pay on its $23.6 billion debt.

Seidman said he believed the reserves were the banks best estimate of future loss, but some analysts say they should be even higher.

``I think we're going to see some more horrendous quarters in the next year or so,'' said Paul Getman, senior financial analyst with Wharton Econometrics, a Philadelphia forecasting firm.

The selling price on the market for the loans indicates they are worth far less than the value which is listed on the banks' books, even with the writedowns, he said.

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