BW Online | January 19, 2001 | America's Slowdown Could Spook Europe's Banks

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JANUARY 19, 2001

FROM LE MONDE INTERACTIF

America's Slowdown Could Spook Europe's Banks
With a big chunk of U.S. company loans held by foreign banks, an economic downturn could have a far-reaching impact

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An announcement from America's second-largest bank, Bank of America, declaring that its bad debt had significantly increased in the fourth quarter of 2000 is sure to provoke reactions from European banks. Figures released by two star analysts at J.P. Morgan, Romain Burnand and Stuart Graham, underscore the sense of anxiety that European banks, which have invested heavily in the U.S., may experience in the event of an economic slowdown.

Indeed, the news could be crushing. Basing their study on a Federal Reserve report, the two analysts found that 40% of the participation loans granted to American companies are actually held by foreign banks. Loans of more than $20 million are shared among at least three banks, most of which are European. According to J.P. Morgan estimates, banks with the largest percentage of their lending portfolios in the U.S. are France's Société Générale with 30%, the Netherlands' ABN Amro with 27%, France's Crédit Lyonnais with 21%, France's BNP Paribas with 20%, Switzerland's UBS with 17%, and Germany's Deutsche Bank with 16%. The sums involved range from $19 billion to $48 billion for each bank.

LUCKY ONES. What's even more striking is how quickly European banks increased their U.S. investments between 1990 and 1999. During this period, ABN Amro's credit portfolio in the U.S. grew from 12% to 27%, BNP Paribas went from 6% to 20%, Crédit Lyonnais from 11% to 24%, and Deutsche Bank from 10% to 16%, according to J.P. Morgan. And many banks actually took part in relatively risky loans, such as Bavarian Bank HypoVereinsbank, Crédit Lyonnais, Crédit Suisse, and Deutsche Bank. Luckily others -- such as Italy's Sanpaolo IMI, Germany's Commerzbank, and UBS -- were more selective.

Any abrupt slowdown in the U.S. economy could have a big impact on the results of the banks having invested most heavily there. The J.P. Morgan report, however, points out that "this is not the scenario that bank economists favor." Still, the report singles out banks likely to be the most affected if there's a slowdown: "Those that are most at risk appear to be the Deutsche Bank, with a potential cost risk of $2.7 billion, BNP Paribas, with $2 billion, ABN Amro and Société Générale, with $1.6 billion, Crédit Suisse, with $1.2 billion, Crédit Lyonnais and [Germany's] Dresdner, with $1 billion, and the Royal Bank of Scotland, with $0.9 billion." The report also says: "This [risk] will not be that dangerous given the size of these banks and given that potential losses will be spread out over a number of years."

But bank analysts are worried this instability will materialize suddenly and brutally. Alan Greenspan already expressed his concern last Dec. 5 regarding the risks of a credit squeeze. But J.P. Morgan points to other problems, as well. The report mentions the dangers for banks that helped finance telecom companies and the negative effect poor financial-market results will have on retail banks. Other analysts point to increased risk factors in countries such as Argentina and Turkey.

Therefore, European banks are cautious as they look forward. Société Générale, which on Dec. 7 announced its investment perspectives for 2001, didn't appear optimistic about the performance of European banks. "The economic slowdown risks weighing heavily on activities in retail banking, while investment banks are very exposed to the volatility of financial markets," says Alain Bokobza, head of strategy at SG Equity Strategy. The road ahead looks uncertain as things move toward a slowdown. And unfortunately for credit providers, that uncertainty could well translate into a pile of bad debt.