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First Interstate Adds $180 Million to Reserves : Move to Cover Loans to Third World May Push 1987 Losses to $556 Million

January 14, 1988|DOUGLAS FRANTZ | Times Staff Writer

First Interstate Bancorp said Wednesday that it was boosting its loan-loss reserves for troubled Third World debt by $180 million.

The increase will bring the bank holding company's reserves to $591 million, which is 53% of its $1.1 billion in outstanding non-trade loans to what are referred to as less developed countries.

The increase will be charged against fourth-quarter 1987 earnings and result in a loss of $95 million for the period, the company said. Without the addition to reserves, the company said it would have posted an $85 million profit for the period.

The fourth-quarter loss will push First Interstate's total loss for 1987 to about $556 million, with final figures expected to be computed and released next week, according to a bank spokesman. The bulk of the loss was the result of a $750-million addition to loan-loss reserves in the second quarter for Third World and other loans.

First Interstate's announcement came two days after its chief Los Angeles rival, Security Pacific, said it was adding $350 million to its loan-loss reserves. The action brought Security Pacific's total reserves to 54% of its $1.8 billion in outstanding Third World loans.

Dan B. Williams, an analyst with the San Francisco securities firm of Sutro & Co., said most big banks will show losses or slight profits for 1987, so many are trying to add to reserves in the fourth quarter to pave the way for better earnings in 1988.

"The feeling seems to be that 1987 was a washout year anyway, so let's get it out of the way," Williams said.

The actions by Security Pacific and First Interstate are expected to put pressure on other big banks to take similar steps for competitive reasons. But if others are going to act, they will have to do so quickly because fourth-quarter earnings reports for big banks are due out next week.

Chicago-based Continental Illinois, holding company for Continental Illinois National Bank, said it will add $200 million to its reserves for Third World debt. The company also said it will report a net loss of about $235 million in the fourth quarter and a loss of $610 million for the year.

Bank of America has the largest Third World exposure of any California bank, but its reserves cover less than 25% of the potential losses. But analysts believe that the San Francisco bank, the state's largest, is too thinly capitalized to add substantially to its reserves in the fourth quarter.

Joseph J. Pinola, chairman of First Interstate, said Wednesday's move reflected the company's strong capital position and that its equity-to-assets ratio, a key indicator of bank strength, was a healthy 4% at year-end. "Our action is designed to establish reserve levels that more appropriately reflect market concerns regarding developing- country credits extended by U.S. banks," Pinola said. He said First Interstate reduced its Third World debt by $220 million in 1987.

U.S. banks sustained losses totaling $17.5 billion in the second quarter of last year afterthe first round of additions to loan-loss reserves. Thisleft average reserve levels at big banks at about 25% of Third World debt exposure. Some smaller banks had made a second round of additions in the fourth quarter, but First Interstate and Security Pacific were the biggest to move up to a level in excess of 50%.

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