Merger Euphoria Won't Bolster Quarter's Profits

Third-quarter results for some big New York City banks should bring a nasty dose of reality to investors distracted by a summer of announcements about cost-saving mergers.

"I think the summer made people feel a little better about the industry and about the New York City banks in particular," said Michael Mayes, a principal at Lyons, Zomback & Ostrowski in New York. "I think it will be a harsh step back into reality, because the fundamentals aren't that good."

While falling interest rates have enabled banks to keep margins wide, analysts said, other basics of profitable banking aren't cooperating so nicely. Loan demand is still weak, and profit-eroding provisions to deal with nonperforming assets are expected to remain high.

Furthermore, earnings from credit cards -- which have propped up weak results in other bank business sectors - are showing signs of accelerated deterioration.

2d-Quarter Rerun Likely

Most analysts, in short, expect little improvement from the second quarter, when earnings increased only slightly.

As they have been throughout the past 18 months, J.P. Morgan & Co. and Bankers Trust New York Corp. are seen as exceptions.

Both are expected to have good, if not excellent, quarters - due largely to trading results. Currency and other markets remained volatile during the quarter, creating opportunities for quick-moving traders.

Palmy Days for Morgan

Analysts predict that Morgan will earn $1.19 a share, virtually flat with its respectable $1.17 a share in the second quarter, according to Zacks Investment Research. Its stock price has soared in the past few days on some upbeat and analyst reports and speculation that it would gain customers as a result of Salomon Brothers' problems.

Few analysts expect Bankers Trust to emulate its stellar performance of last quarter, when the company earned $2.16 a share. In fact, they are projecting a drop to $1.71 a share, according to Zacks, a number that most analysts still applaud.

One of the biggest quarterly improvements is expected at Bank of New York Co., which earned 75 cents a share in the second quarter. The analytical predictions for the current quarter range from 75 cents to 95 cents a share in the third quarter, according to the Chicago-based Zacks.

Analysts said their projections reflect the belief that loan-loss provisions will be slightly lower.

The third quarter is expected to be a dreary repeat of the recent past for most other big Gotham banks.

Chemical Banking Corp.'s results should be slightly weaker than last quarter, analysts predict, while merger partner Manufacturers Hanover Corp. is expected to be substantially weaker. Its results will look bad against a background of tax credits recognized in the second quarter, which it cannot repeat now, analysts said.

Focus on Chase, Citicorp

Most of the negative attention, however, is focused on Chase Manhattan Corp. and Citicorp, widely viewed as the weakest banks in New York. At some point this year, many analysts predict, both banks will make some radical moves to cut expenses, including dividend cuts. Big layoffs also may be in the offing, an exercise that would result in a large reserve to cover severance payouts, branch closings, and other expenses.

Analysts are expecting anything from a loss of 12 cents a share at Citicorp, the nation's biggest bank, to profits of 40 cents a share.

The average Wall Street estimate for Chase is 63 cents a share in the third quarter. However, some bears, like Merrill Lynch & Co.'s Judah Kraushaar, are estimating Chase third-quarter results of 44 cents a share.

Ronald Mandle, an analyst at Sanford C. Bernstein, said he thinks Chase will have to lay off as many as 2,000 more people in the next year. The company last year cut its staff by 5,000. Mr. Mandle said another pruning is necessary if the bank is to meet its goal of keeping expense growth for 1992 to 1%.

Cost Cuts May Grow Larger

Citicorp, for its part, is about halfway toward its goal of cutting $1.5 billion in annual expenses by the end of next year.

However, analysts believe that the two big banks may have to revise their cost-cutting goals because the economy is not rebounding as quickly as anticipated. That could mean that Citicorp and Chase may once again be in for a painful round of dividend cuts by the end of the year, analysts said.

Furthermore, reserves for credit losses remain below average at the two companies. Citicorp's reserves stand at at 47.9% of nonperforming loans, while Chase's is at 51.1%.

Citicorp chairman John Reed said last week that additions to loan-loss reserves in the third quarter will remain high, leading analysts to forecast a number of about $900 million.

Citicorp took a $1.03 billion provision in the second quarter while Chase has seen its total reserves drift lower.

|Not Encouraging'

"It's not encouraging to see a company without terribly strong reserves allow them to drift lower," said Merrill's Mr. Kraushaar.

He said corporate finance activity has been weak in the third quarter, while Chase's acquisition of Citytrust and Mechanics & Farmers Savings Bank in Bridgeport in August will add to expenses.

Accelerating deterioration in California real estate markets also could add pressure to the earnings at Chase and Citicorp. Both the nation's third-largest and largest banks have big loan portfolios on the West Coast.

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