Argentina Won't Swamp FleetBoston


By David Shook As one-two punches go, FleetBoston Financial (FBF) just took a hard combo on the chin. First came the disclosure on Dec. 19 that the nation's seventh-largest bank would miss its fourth-quarter earnings targets by a long shot. Instead of the 62 cents-per-share profit that analysts had expected, Fleet posted a mere 3 cents a share. Three reasons were given for the huge disappointment: Argentina's currency crisis, venture-capital writedowns, and corporate bond losses related to, among other things, the Enron debacle.

Now, Argentina's government has unveiled an economic stimulus plan that will likely foist even larger loan losses on Fleet. Result: The Boston-based bank, which is heavily invested in Latin America, has postponed its fourth-quarter earnings announcement until late January, waiting for the picture to become clearer. Meanwhile, speculation is rife that the nation's largest financial-services company, Citigroup (C), will acquire Fleet -- in part because the Argentine mess could be much worse than it first appeared.

PEANUTS TO FLEET. So how should investors view Fleet in its current state of flux? Actually, the smart money might be on Fleet cleaning up its act. Many analysts believe that further earnings writedowns for 2002 are already priced into the stock. Or a merger with Citigroup may also be in the offing. Either way, investors would probably be safe with a Fleet holding.

Truth is, the prevailing wisdom behind the merger -- that Fleet is reeling because of Argentina -- might be flawed. While Latin America accounts for 9% of Fleet's earnings, Argentina contributes only 3% of its total profits. Fleet holds $600 million in Argentine government loans, but that's less than 1% of total loan assets. In short, Argentina is peanuts compared to Fleet's U.S. banking businesses. Meanwhile, Fleet spokesman Jim Mahoney says: "Our approach has been to be as proactive as we can in dealing with the Argentine crisis."

Even after all the bad news, Fleet's stock is trading at $34 a share, 20% below its one-year high. Some stocks lose more than that for missing earnings forecasts by a penny. More disturbing news could further damage earnings, but the Citigroup rumors have helped keep the stock from swooning. Fleet shares declined from $38 in December to as low as $33 earlier this month, before inching back up.

STILL ROBUST. Some analysts think more than merger speculation has helped kept Fleet's stock afloat. For one, Fleet's long-term financial health isn't in jeopardy. Investors shouldn't underestimate the strength of its sprawling retail banking business, concentrated in the Northeast. The 1,500-strong branch system generates enormous cash flow that offer a cushion against nearsighted Internet and telecom investments, Enron, even Argentina.

Cash flow is a good measure of a bank's ability to absorb shocks to the system. While Fleet's net income fell more than 50% in the first nine months of 2001, cash flow from operations increased 20%, to $1.2 billion. "A bank like Fleet has such enormous cash flows that it can absorb a hit like Argentina," says Dick Bove, managing director for Hoefer & Arnett, a San Francisco research boutique. "Investors know Fleet will ultimately find its way out of this."

Indeed, while the mess in Argentina complicates matters, Standard & Poor's analyst Stephen Biggar says the bank remains well positioned at home. In December, S&P named Fleet one of 35 stocks expected to outperform the broader market in 2002. One reason: Its relatively low valuation compared to other banks. Fleet has a price-to-earnings ratio of 15 compared to Citigroup's 19 and J.P. Morgan Chase's (JPM) 27.

LOGICAL COMBO.Still, since Citigroup needs a stronger consumer banking presence in the Northeast, according to Hoefer & Arnett's Bove, Fleet would fill the bill. "The fit across the board is perfect. Citigroup has a significant need for core deposits, and that's something Fleet can provide," he says. On paper, a combo seems logical.

And if a merger doesn't materialize? Then life goes on for Fleet. Most of the fourth-quarter writedowns announced in December come not from Argentina, but from lackluster VC investments in telecom and technology, and corporate bond losses, most notably from Enron. The bank absorbed most of the pain from these losses in the fourth quarter, analysts say. As it retrenches, it can rebuild going forward.

Granted, the situation in Argentina changes every day -- and it could cause further havoc to Fleet's bottom line. But the travails of this Latin American country aren't likely to cripple the seventh-largest U.S. bank. That's why Fleet investors might be breathing a little easier these days. More than likely, Argentina's woes have already done their damage, and the stock could be on the mend. Shook writes for BusinessWeek Online in New York. For more, check out our Street Wise archive


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