11/17/97 RIDING OUT THE STORM

Return to main story

RIDING OUT THE STORM
So far, U.S. financial firms haven't been badly hurt
When the U.S. stock market dived 7% on Oct. 27, financial issues were among the hardest hit. Amid worries that the economic troubles in Asia and other emerging markets would damage earnings, shares of Merrill Lynch & Co. and Morgan Stanley, Dean Witter, Discover & Co. plunged about 12% each. Stocks have since recovered, as have traders' hopes for most big U.S. financial firms that have big overseas businesses. Outside of a few large banks and hedge funds, most U.S. financial institutions are likely to emerge relatively unscathed from the market's tantrum.
In contrast to their position during the 1980s developing-country lending crisis, U.S. banks now have stronger balance sheets to weather storms. The Federal Reserve says that total foreign lending by U.S. banks was $652 billion as of June 30. Of that, only $131 billion are Asian loans--less than 3% of the banks' total assets. ''There is a general sense that banks are well-capitalized and can weather any problems from this,'' says one U.S. regulator.
Most U.S. securities firms also seem able to ride over the bumps. True, they got a bad scare. But so far, the ups and downs have had little bottom-line impact. ''Undoubtedly, on Wall Street there are trading desks that had a great year ruined. But at Morgan Stanley, it didn't really have an impact,'' says Morgan Stanley Chief Financial Officer Robert G. Scott. Morgan Stanley, which used to earn almost half of its revenues overseas, now garners around 18% of its revenues outside the U.S., thanks to its combination with the predominantly domestic Dean Witter Discover.
Another company that says it will survive Asia's storms is American International Group Inc. Although the big insurer derives 38% of its operating earnings in the Far East, much of that comes from Japan, where profits remain strong. In addition, says Chairman Maurice R. Greenberg, AIG's Asian insurance units do their business in local currencies, insulating them from gyrations in the dollar's value. ''Our bottom line is hardly affected at all,'' says Greenberg, who views Asia's turbulence as an opportunity to acquire stocks, bonds, and, possibly, entire companies in the region.
That's not to say that news of isolated trading losses won't trickle out or that everyone is in the clear. Citicorp, the U.S. bank with the most exposure in Asia and the Pacific, is still trading 7% below its precrash level of about $139 per share. Analyst George M. Salem of Gerard Klauer Mattison & Co. figures Citi derives 20% to 25% of its net income from Asia, with an additional 25% from Latin America. Citi is also the only American bank that has a major business outside the U.S. making auto loans and mortgages and selling credit cards. As of Sept. 30, Salem estimates Citi had $60 billion in loans to Asian borrowers, with $35 billion of that in consumer lending. Asia's troubles will spell roughly $300 million in Asian loan losses for Citi next year, estimates Salem, adding: ''Citicorp is losing one of its principal engines of high growth.''
Still, Salem hasn't reduced his 1997 and 1998 earnings estimates of $8.40 and $9.30 a share, respectively. Indeed, some analysts still rate the New York-based behemoth a strong buy. Morgan Stanley analyst Arthur P. Soter believes Citi can take advantage of Asian competitors' weakness to attract new depositors and even buy rivals. Citi spokesman John M. Morris adds that the bank, in the past, has picked up market share in turbulent times.
Other bankers are also staying the course abroad. Take Sanford R. Robertson, chairman of BankAmerica Corp.'s Robertson Stephens securities unit. During the recent White House dinner for Chinese leader Jiang Zemin, Robertson used his 20 seconds on the receiving line to boast that his firm had just financed three high-tech companies in China. In 1996, BofA derived 8% of its income from the Asia-Pacific region. ''We are really committed to the area, and that has not changed,'' says Robertson.
While many U.S. banks will be able to shrug off the Asian crisis, some European lenders, including Deutsche Bank, Societe Generale, and Banque Nationale de Paris, could face rising losses in the region. Morgan Stanley Dean Witter analyst Alan Broughton estimates that in an ''absolute worst-case scenario,'' Deutsche could see 1997 earnings fall as much as 12%. He believes BNP could see charges of as much as $155 million.
LIVE OR DIE. Even though stock markets got the headlines, it was declines in emerging-market bonds that will haunt some banks and hedge funds. As some issues fell 30 points in one swoop, Chase Manhattan Corp. may have had over $100 million in emerging-market trading losses, say competitors. Chase declined comment. But even if Chase lost big money trading, it's not expected to feel much pain. Chase made $1.9 billion in the first three quarters of the year from trading. And in 1996, only 6% of its income came from Asia, with 5% from Latin America, says Standard & Poor's Corp. analyst Tanya S. Azarchs. ''This is not something they live or die by.''
Competitors say Credit Suisse First Boston, the Swiss-owned investment bank, may also have taken a pounding. It is the leader in trading Russian debt, with 500 employees in Moscow. But even though the value of some Russian bonds plunged 7%, Alexander M. Knaster, the head of CSFB's Moscow office says, ''I'm not even sure we had any damage. If we did, it was insignificant.''
Some hedge fund managers were hammered. Victor Niederhoffer announced on Oct. 29 that his equity positions were ''wiped out'' by the stock market correction. Losses in Russian securities caused George Soros to take a beating. And a source close to Leon G. Cooperman says his domestic and offshore funds were down about 6%--or $60 million to $70 million--on Oct. 27, because of losses in emerging market debt. Cooperman is still up 28% year to date, says the source. Some managers are faring even better. Julian Robertson's offshore Jaguar fund, with some $7 billion in assets, is up 40.3%, after fees, through Oct. 31.
Jaguar's worst damage came on Oct. 24, the Friday before the Wall Street crash, when the fund fell 1.7%. Robertson's fall was cushioned because he was ''out of Asia for the most part'' by October, except for a short position in the Hong Kong dollar, says a source familiar with Robertson's portfolio. Asia's financial crisis has sent waves around the world. But fortunately for many U.S. firms, the aftershocks so far were little more than a ripple.
By Leah Nathans Spiro, with Gary Weiss, in New York, Amy Barrett in Philadelphia, Dean Foust in Washington, and bureau reports

Return to main story