US Bank Exposure in South America. Is this the great profit opportunity or the problem to come?
(C) WSJ
Sept. 10, 1998,
All use Prohibited/ For Private Use Only
U.S. Banks' Ties to Latin America
Are Raising Concerns About Risks
By PAUL BECKETT
Staff Reporter of THE WALL STREET JOURNAL
"Russia may have taken its toll on U.S. banks, but the damage could be much worse if Latin American economies start to falter.
Anxiety about big banks' exposure in Latin America has lurked in the background during the recent tumble in banking shares. Now those worries are coming to the fore as the economic turmoil in Asia and Russia starts to ripple through Latin American countries. Although most experts don't expect any severe downturn in the region for now, banks could still see their earnings hurt by a slowdown in business.
At the end of March, U.S. banks' total outstanding cross-border exposure in Latin America stood at $76.4 billion, second only to their exposure to the largest western nations and Japan, and more than 10 times their $6.8 billion exposure to Russia, according to the latest figures available from the Federal Reserve. Much of the Latin American exposure is in the form of commercial loans and other types of credit. It doesn't include indirect exposure through lending to hedge funds and other institutions that invest in Latin America.
"Russia was really very minor in its impact on U.S. banks, and a similar crisis in each of these Latin American countries would be much greater [in impact]. There's no getting around that," said Tanya Azarchs, analyst with Standard & Poor's Ratings Services.
Limited Parallels With Russia
Most of the concern focuses on Brazil, where the stock market has fallen sharply in the past six weeks and local interest rates have jumped as part of an effort to defend the currency. U.S. banks' exposure there totals $27.2 billion, according to the Federal Reserve.
But the parallels with Russia go only so far. Few believe that Brazil, Argentina or Mexico would effectively default on domestic government debt, as Russia did. Moreover, the mix of U.S. banks' involvement in the region -- which includes retail and commercial lending, syndicated loans, short-term trade financing, and trading -- is far wider than in Russia and should be better able to cushion blows.
Some even see opportunities despite an anticipated economic slowdown. "We are very well-positioned; these kinds of situations are normally positive for us," said Henrique Meirelles, president and chief operating officer at BankBoston Corp. and the former head of the bank's Brazilian operations. Higher local interest rates can benefit fixed-income mutual funds and generate bigger fees, he said, while loan losses from the bank's top-tier borrowers are expected to be negligible.
"The major U.S. banks have an important historical record of involvement," said Judah Kraushaar, analyst with Merrill Lynch & Co. "And even in periods of turmoil, they've been able to make pretty good money in their capital markets divisions."
Size of Exposures
Still, big risks remain. Souring loans to below-investment-grade commercial customers could result in losses for some banks. And the syndicated-loan market, where a loan is divided among several banks, appears to be slowing. In 1997, syndicated loans in the region totaled $55 billion, up from $29 billion in 1996, according to Loan Pricing Corp. In the first half of this year, loans totaled $25 billion, but "there's been a slowdown in doing new deals and banks are taking a wait-and-see approach," said William Craighead, an analyst with Loan Pricing.
The sheer size of the banks' exposure also means that even a small slowdown in business could have a significant impact on earnings. Citicorp had the largest Latin American exposure, of $15.5 billion, at the end of June, including $4.4 billion in exposure to Brazil and $3.4 billion in Mexico. Of the total, $5.9 billion was in trading and short-term claims.
Chase Manhattan Corp.'s exposure in Latin America at June 30 totaled $13.6 billion, of which $12.7 billion was related to lending and $900 million was in foreignexchange and derivatives exposure.
J.P. Morgan & Co.'s exposure in Brazil at the end of June totaled $4 billion. The company didn't disclose its exposure to other countries.
BankBoston's Latin American exposure stood at $5.4 billion at June 30, while NationsBank Corp.'s had exposure of $2.8 billion. American Express Co.'s exposure, through its banking unit, was about $1.1 billion.
Bankers Trust Corp., which suffered the most of any U.S. bank in Russia, had about $2.4 billion of exposure in Brazil, Mexico, Argentina and Venezuela at the end of August, after sharply reducing its exposure in these markets in the past two months, a spokesman said.
Four years ago, many U.S. banks were buffeted by Mexico's peso devaluation. Since then, U.S. banks' exposure in Mexico, which totaled $17 billion in March, has been mainly confined to blue-chip corporations active in the U.S. syndicated-loan market.
BankAmerica Corp., for instance, which had total Latin American exposure of $11.3 billion at the end of June, has largely confined its Mexican exposure, which stood at $3.9 billion, to a handful of triple-A-rated Mexican companies and just a few promising smaller ones.
Right now is a time to "look at your portfolio and ask yourself, 'Are all these clients keepers?' " says James McCabe, president of BankAmerica's unit in Mexico. "If this is prolonged, we will have to work our way towards a tighter client base." |
