U.S. bank stocks can't shake emerging market blues
Latin America, once again, is emerging as a potential trouble zone for U.S. banks, as Colombia announced a de facto currency devaluation and Moody's Investors Services placed some of Argentina's long-term paper under review for a possible ratings cut, and actually downgraded paper in Brazil.
By Mary Kelleher
NEW YORK (Reuters) - Big U.S. banks have come clean on how much money they lost as a result of economic turmoil in Russia, but the disclosures have done little to assuage Wall Street's worries about loans and losses.
Latin America, once again, is emerging as a potential trouble zone for U.S. banks, as Colombia announced a de facto currency devaluation and Moody's Investors Services placed some of Argentina's long-term paper under review for a possible ratings cut, and actually downgraded paper in Brazil.
In 1982, Mexico shocked its bankers, including most of the biggest U.S. bank holding companies, by announcing the need to restructure its bank debt. That touched off the crisis in less developed country, or LDC, debt,, which led to the Brady bond plan, named after Nicholas Brady, then the U.S. Treasury secretary. The LDC debt crisis, also dealt with by a bank committee headed by Citicorp Vice Chairman William R. Rhodes, didn't completely fade
off most U.S.money-center banks' balance sheets until the mid-1990s.
Investors now are scared of further slides in other emerging markets, fearful of a slowdown in U.S. capital markets and watchful for signs of a global recession, they said. And they have good reason to fear -- with the late 1994 collapse of Mexico's peso, which came to be known as the ''tequila crisis,'' not too far off in the rear view mirror.
''There is a whole laundry list of worries out there,'' Sean Ryan, an analyst at Bear Stearns, said. ''I don't even know if it's localized -- there seems to be free-floating angst.''
The battered shares of money-center banks were punished again on Thursday, as Citicorpfell $10.25 to $98.50, Chase Manhattan Corp. slid $5.625 to $49.25, Bankers Trust Corp. lost $6.375 to $67.125, and J.P. Morgan & Co. Inc. fell $6.50 to $88.75.
American Express Co. stock slid $6.50 to $77.25.
While the economic and political climates of countries like Brazil, Argentina and Mexico are seen as far more stable now than those of Russia or Indonesia, banks aren't immune to trading or loan losses in Latin America, analysts said.
Economic troubles in Asia and Russia have spilled over to hurt securities prices in the region and U.S. money-center banks have much more money at risk here than in other emerging markets. Depressed prices for energy and other commodities have also helped spread Asia's woes to other parts of the globe.
''I think people are edgy about it,'' David Berry, an analyst at Keefe, Bruyette & Woods Inc., said. ''While Russia was more Europe's problem and Asia was Japan('s) and, to a certain extent, Europe's problem, Latin America is where the U.S. banks go.''
Brazil's financial markets were hit Thursday after Moody's downgraded its foreign currency debt. And Standard & Poor's said Brazil and Venezuela were the least credit-worthy in Latin America.
Moody's also said on Thursday it has placed Argentina's long-term foreign currency country ceiling for bonds, notes and bank deposits on review for possible downgrade.
The six money-center banks - Chase, Citicorp, BankAmerica Corp. J.P. Morgan, Bankers Trust and First Chicago NBD Corp. - had total cross-border exposure to all of Latin America of $61.9 billion, with local country liability of $37.0 billion at the end of March, Brown Brothers Harriman analyst Raphael Soifer said, based on data banks give regulators.
This far surpasses money the banks are owed in Russia or Asia and comes alongside wild gyrations in financial markets that have wiped out equities-related gains at banks, such as Chase, and caused trading losses in the third quarter.
Throughout the 1980s, Mexico, Brazil and Argentina were known as ''the MBA countries,'' a reference to their prominence in the LDC debt crisis. Brazil, after an April 1994 agreement to restructure its commercial bank debt, had enjoyed some economic stability and growth. But Brazil's latest market turmoil began toward the end of 1997 when currency speculators switched their sights from Asian currencies to the Brazilian real, Soifer noted.
''I think a lot of the disclosures in the past few days about trading losses reflect a pretty astonishing collapse in emerging market debt prices in August that was probably across the board,'' Berry said. ''You could have had no Russian exposure and still taken substantial losses by holding Brady bonds.''
Chase Manhattan estimated on Wednesday that net commercial charge-offs in the third quarter would be about $200 million, mostly reflecting tough conditions in Russia and Asia. Its trading revenues during July and August were $160 million, sharply below second-quarter trading revenues.
Citicorp has estimated its total losses, including trading, related to Russia would reduce after-tax earnings by about $200 million in the third quarter, while Bankers Trust is now forecasting a loss for its third quarter because of weak trading results that were exacerbated by Russia's economic and political turmoil.
A further slide in the Russian rouble spooked stocks on Thursday, as did the announcement on Wednesday of a de facto currency devaluation in Colombia, even though Colombia isn't viewed as one of the key Latin American economies, analysts said.
''The question is: Where will the global currency meltdown stop?'' Michael Ancell, an analyst at Edward Jones, said. ''This has introduced a lot of uncertainty into the market and made these stocks very volatile. What's needed is leadership on the political front, and that seems to be sorely lacking.''
But analysts said emerging markets aren't the only concerns gnawing at investors. They point to a slowdown in corporate finance and other aspects of the securities industry, sliding U.S. stock markets, and the chance of a world recession.
In this kind of environment, the economically-sensitive bank stocks would be hit hard, analysts said.
''I think the belief is growing that bank earnings will slow because their loan growth will slow and they will have to add more than they have been adding to their loan-loss reserves,'' Michael Schroeder, an analyst at Wasmer, Schroeder & Co., said.
Citicorp said its exposure to Latin America, as of the second quarter, totaled $15.5 billion, while its exposure to Russia was by now well under $400 million.
Chase has said its exposure to Brazil was about $3.5 billion. By contrast, Chase has direct exposure in Russia of about $250 million, and indirect exposure -- or exposure to non-Russian institutional investors and money managers -- of $210 million.
19:38 09-03-98
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