BankAmerica may place as much as $1.5 billion of loans to Brazil on non-performing status, a move that could cut its earnings as much as $120 million over a year and hamper its recovery efforts, analysts said Wednesday.
Other major California banks also face potential losses, but they would be much smaller and less adverse than BankAmerica's, given the other banks' stronger overall earnings and their relatively smaller exposure to Brazilian loans, analysts said.
However, they added, all or most of these possible losses may be avoided if agreement can be reached by summer with Brazil on restructuring its $109-billion foreign debt. "It's possible all this is academic," said Dan B. Williams, analyst at the San Francisco securities firm of Sutro & Co.
"We're looking at a worst-case scenario," said Felice Gelman, a banking analyst at the New York securities firm of Fox-Pitt Kelton, adding that a suspension of payments by Argentina in 1984 resulted in little actual loss to banks because the loans were restructured.
Brazil declared Feb. 20 that it was indefinitely suspending interest payments on $68 billion in medium- and long-term loans, a move that prompted Citicorp, Manufacturers Hanover Trust and several other major U.S. banking firms to warn that they may place Brazilian loans on non-performing status.
Federal banking regulations require banks to declare loans as non-performing if interest payments are overdue for 90 days or more. Placing loans on non-performing or "cash" status means that banks cannot record interest payments until they are actually received in cash.
San Francisco-based BankAmerica, the third-largest U.S. lender to Brazil after Citicorp and Chase Manhattan, disclosed its potential placing of loans on non-performing status in a little-noticed Securities and Exchange Commission filing last Thursday. The bank said in the filing that it had $2.7 billion of total loans outstanding to Brazil, of which $1.2 billion was short-term and thus not subject to Brazil's suspension of payments.
Continued nonpayment of interest on the remaining $1.5 billion "could result in the loans being placed on (non-performing) status," the filing said.
Analyst Gelman said that such a move would result in $120 million in lost interest per year, based on the 8% interest rate normal for such loans. BankAmerica's after-tax earnings would be cut by the full $120 million because it has no tax liability, thanks to tax-loss carryforwards that it accumulated from previous losses, she said.
Such a loss could cut BankAmerica's overall after-tax earnings this year by about 40%, to $178 million from $298 million, Gelman predicted. By contrast, she said, the three other major California banks with significant loans to Brazil would suffer only minor earnings cuts at worst.
Security Pacific may suffer a $29-million pretax earnings cut, which would cut its after-tax earnings by only about 3%, she said. Wells Fargo would suffer a $30-million pretax earnings reduction, which would trim its after-tax earnings by 6%. First Interstate Bancorp would suffer a $25-million pretax earnings reduction, which would translate to only a 4% drop in after-tax earnings.