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Canadian banks clean LDC debt. Or are they sweeping third-world loans under the rug?

Canadian banks appear to be cleaning up their problem of bad third-world loans. But at least one bank analyst says they are just sweeping unpaid bills under the carpet. The year-end for the banks was Oct. 31, and all of the big six reported a profit. Last year all but one - Toronto Dominion Bank - reported a loss. The banks are making money at home but losing on unserviced foreign debt. The Canadian banks have $24 billion (Canadian; US $19.9 billion) in outstanding third-world debt.

The six largest banks in Canada do almost 90 percent of the banking business in the country. Five of them are run from bank towers within a block of the corner of King and Bay Streets in Toronto. They are, in order of asset size, the Royal Bank of Canada, the Canadian Imperial Bank of Commerce, the Bank of Montreal, the Bank of Nova Scotia, and Toronto Dominion Bank. The sixth-largest, the National Bank, has its head office in Quebec and does most of its business there.

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Because of the concentration of the Canadian commercial banking system in the six large banks, the debt crisis over foreign loans seems more acute than in the United States, where there are 14,000 banks of varying sizes.

All of the Canadian banks got heavily involved in loans to poor third-world nations, also called less developed countries, or LDCs. Lending to foreign governments seemed safer than financing business ventures at home, especially when the real estate, farming, and oil business were not faring well in the early 1980s.

When these countries ran into financial difficulties, with many not even paying the interest on their loans, Canadian banks were left with billions of dollars in hazardous debt.

Over the past several years, the banks have been writing off the debt, and in this latest reporting period they have reported good news, saying in effect that the third-world debt crisis is over. They haven't collected the money, but the crisis is over because the loans have been written down or the debt sold - ``swapped'' at a drastically reduced rate to get them off the books.

Take the Royal Bank of Canada, the country's largest. It is still owed $6 billion by third-world countries. The company has set aside $2.3 billion to cover that debt.

There is some good news for the Royal Bank. Brazil has started to repay some overdue interest and principal, and that should reduce overall debt to the bank by $50 million in the first quarter of the year.

The chairman of the Royal Bank, Allan Taylor, says the bank has bitten the bullet on third-world loans and will now be a more profitable operation. ``The medicine has been hard to swallow at times, but it's made the Royal Bank a much healthier, leaner, and certainly a stronger organization,'' Mr. Taylor said.

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The Bank of Montreal did a debt-for-equity swap with Brazil this year. ``The worst of the problems are definitely behind them,'' said one banking analyst, who expects the banks to continue reporting higher profits while reducing exposure to LDC debt.

But a Toronto-based analyst with a small institutional brokerage says the debt is still there and so is the problem.

``There is a secondary market for this debt, and they are paying 38 cents to the dollar for third-world loans. The banks are putting those loans on their balance sheets at 60 cents to the dollar,'' says bank analyst John Tha, of the Toronto firm of Andras Research Capital.

Mr. Tha says he winces when he reads headlines of bank profits doubling. He just doesn't believe the numbers, because of the accounting problems in listing the value of the debt owed by countries such as Mexico, Brazil, and Argentina.

``To say life is rosy in the banks stretches my credulity. The exposure of Canadian chartered banks to LDC debt still has a potential for disaster,'' Tha says. ``And institutional investors in particular are tone deaf on LDC credit woes.''

Even though some of those debt problems have been ignored, the two banks with the least exposure to those loans, the Toronto Dominion Bank and the Canadian Imperial Bank of Commerce, have been the darlings of the stock market.

Toronto Dominion sold or swapped $1.7 billion of its third-world debt in 1988, reducing the total to $602 million, or 18 percent of common equity, a much lower total than that of the other big banks. About 80 percent of those loans were to Brazil, Mexico, and Venezuela. This month the bank increased its quarterly dividend to 33 cents a share, up from 28 cents.

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