Does Wells' Bombshell Spell Trouble for Rivals?

Bank stock analysts were divided Wednesday over whether Wells Fargo & Co.'s problems with loans financing highly leveraged transactions are a sign of trouble for other big lenders.

"The Wells announcement reminds me of commercial real estate," said Thomas Hanley, the senior bank stock analyst at Salomon Brothers. "First it happened at one bank, and all of a sudden - boom - it could be all over the place."

But most analysts were less pessimistic than Mr. Hanley.

A Different Source

"The problem is pretty much isolated to Wells Fargo," said Ronald Mandle of Sanford C. Bernstein & Co. "We will see nonperformers continue to advance at other banks and peak at year's end. But this announcement comes primarily from Wells Fargo's approach to HLT lending, which was to take bigger pieces of fewer loans."

Wells said Tuesday that it would add $350 million to its loan loss reserve, write off $180 million in credits, and earn about $15 million.

The gloomy announcement, which came on the heels of a regulatory examination of Wells' loans financing highly leveraged transactions, dashed investors' hopes that the pace of writeoffs and reserving at the nation's biggest banks might level off in the second quarter.

Motivation Is Questioned

Bank stock watchers were nevertheless nervous about the motivation for the Wells announcement.

"I don't think that you are going to see big hits like this elsewhere, though it does raise the issue of whether there is a new regulatory stance on this," said Carole Berger, who follows big banks for C.J. Lawrence Inc.

Ms. Berger said she expects loan loss provisions at most big banks to match those in the first quarter, "which should result in some pretty lousy operating earnings."

Salomon's Mr. Hanley was gloomier still. "I have a feeling there will be a fallout," he said. "I just can't imagine only Wells has such a bad portfolio while Chase, Citicorp, and others are clean."

But Judah Kraushaar, an analyst at Merrill Lynch & Co., disagreed. "Most of the banks with big HLT portfolios that I've talked with are saying the rate of growth in nonperformers will be consistent with last quarter or trending slightly downward," he said. "If regulators were really taking a harder line on HLTs, I'd doubt you'd be hearing that."

Mr. Hanley speculated that Bank of New York Co., which took a $343 million provision in the first quarter to cover its commercial loan portfolio, may be the first to follow in Wells' footsteps. He also cited Manufacturers Hanover Corp. as another bank that is "apparently having a problem."

Only a Few Unscathed

The Salomon analyst said that Bankers Trust New York Corp., First Chicago Corp., and NCNB Corp. are the only companies indicating relatively smooth passage through the current round of examinations of syndicated loans that many banks participate in.

Near the close of trading Wednesday, shares of most banks with large leveraged buyout portfolios were rebounding slightly from earlier declines. Bankers Trust fell 12.5 cents, to $49.75; Bank of New York Co. fell $1, to $27.50; Citicorp was off 12.5 cents to $15.25; Continental Bank Corp. declined 37.5 cents, to $11.50; First Chicago fell 25 cents, to $18.125; NCNB, down much of the day on reports of a bid for C&S Sovran Corp., rebounded 12.5 cents, to $38.25; and Manufacturers Hanover Corp. recovered some of Tuesday's Wells-related loss, rising 62.5 cents, to $21.75. Prices of bank bonds were also off. "It was kind of like a case of the jitters resulting from the Wells announcement," said Thomas Quigley, a senior vice president at Donaldson, Lufkin & Jenrette. "It shows the market is susceptible to surprises."

Correction Is Expected

Several analysts said that the Wells development, whatever the cause, will launch a long-term market correction that was inevitable given bank stocks' meteoric rise since October.

"This credit cycle is going to take longer to play out than a lot of people thought," said Arthur Soter, a bank analyst at Morgan Stanley & Co. "I do not think we are at the beginning of a second stage of major credit problems. But the market's enthusiasm for these stocks probably got ahead of itself."

Sanford C. Bernstein's Mr. Mandle expects most banks to continue increasing their nonperforming assets and reserves throughout the rest of the year, but at a moderating pace.

Biggest HLT Lenders

Ranked by HLT loans as percent of portfolio at yearend 1990Continental Bank 14.65%Bank of Boston 14.33Bankers Trust 13.97Bank of New York 12.78First Chicago 11.55NCNB 9.97Mellon Bank 8.84PNC Financial 8.17Wells Fargo 7.45Manufacturers Hanover 7.27

Source: Thomson Bankwatch

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