Bankers Trust, Morgan Given Top Asset Ratings
It's earnings time, and investors are poring over the latest data to determine the relative asset quality of banks.
The hitch, though, is that banks account for problem credits in different ways, even when they are dealing with the same asset -- say, a broadly syndicated loan.
Brown Brothers Harriman & Co. analyst Raphael Soifer has hit upon a way that sheds some light on the confusing situation: comparing how banks account for the holdings of so-called Brady bonds.
Brady's |Rare Window'
The bonds take their name from the international debt program launched in 1989 by Treasury Secretary Nicholas Brady.
Under the plan, billions of dollars of bank loans, mainly to Mexico and Venezuela, were exchanged for specially issued, deeply discounted securities, known as Brady bonds.
Banks were required to disclose how they accounted for their holdings of the bonds, providing what Mr. Soifer calls a "rare window" into how different banks account for the same problem credit.
Accounting Approaches
In a recent report, the Brown Brothers analyst looked at the ways eight banks accounted for the securities.
His thesis: How each bank accounted for its Brady bonds reveals its approach toward the treatment of problem credits in general.
Praise for Conservatism
The eight banks discussed in the report are units of: Bank-America Corp., Bankers Trust New York Corp., Chase Manhattan Corp., Chemical Banking Corp., Lloyds Bank PLC, Manufacturers Hanover Corp., Midland Bank PLC, and J.P. Morgan & Co.
Among the U.S. banks, Morgan and Bankers Trust got the highest marks from Mr. Soifer for their conservative accounting treatment of the bonds.
"It's no accident," Mr. Soifer said in a telephone interview Friday, that those are the very banks that are perceived to have the best asset quality.
Bankers Trust, in fact, was the only U.S. bank to classify the bonds as nonperforming. The bonds are carried as loans, at par, and included in the banks' outstandings to Mexico and Venezuela.
Mark-to-Market Solution
Morgan took a different, but equally sound approach, according to Mr. Soifer.
Morgan marked the bonds to market, took a charge, and recorded them as investment securities. As such, the bonds are not included in Morgan's outstandings to Mexico, and they are not classified as nonperforming, Mr. Soifer said.
The other U.S. banks followed less conservative accounting practices, Mr. Soifer said.
Chase, Chemical, Hanover, and Bank of America carry the bonds as loans, but they are not classified as nonperforming, or included in outstandings to Mexico and Venezuela.
