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Asia batters bank profits
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January 20, 1998: 1:12 p.m. ET
Expert says Pac Rim crisis hurt 4Q earnings, warns about multinationals
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NEW YORK (CNNfn) - Big banks reported their latest quarterly results Tuesday, many citing Asia's impact on their bottom lines. J.P. Morgan was particularly badly hit, coming in far below Wall Street's expectations. Citicorps came in slightly better than anticipated by analysts and Chase Manhattan was fairly on target.
Jim McDermott, chairman of Keefe, Bruyette & Woods, appeared on CNNfn's "In the Game" to make sense of the numbers.
Here is a partial transcript.
STUART VARNEY, CNNfn ANCHOR, IN THE GAME: Citicorp slightly better than expected. Chase Manhattan in line. J.P. Morgan missed the Street's estimate. All of them saying Asia had an impact. How big an impact?
JIM MCDERMOTT, KEEFE, BRUYETTE & WOODS: I don't think there's any question that Asia has had an impact. We saw it in the trading revenue lines. We see it in higher provisions for loan losses. We see an increase in net charge-offs at some of these companies. And we also see it in Morgan's case in a rather sizable increase in the level of non-performing assets. So there's no question that there's headline risk here with these U.S. multinational banking companies, and it's been reflected in fourth-quarter results -- likely will continue to be reflected in the first half of 1998. This is a problem the dimensions of which we're still wresting with in terms of the impact on U.S. banking companies.
VARNEY: But we are not talking about all U.S. banking companies across the board. No, we're really zeroing in on what we used to call the major money center banks.
MCDERMOTT: Yes. I think you have to have a dichotomy here between those U.S. multinationals that have a direct exposure and are impacted directly in terms of revenue slowdowns or deterioration in their credit quality, and the large majority of regional banking companies that represent and reflect the strong U.S. economy, and that are hitting the numbers with regularity and even exceeding them in many cases.
VARNEY: Now, one of the big criticisms of Asian banks throughout this crisis has been that they are not transparent. We really have not got a direct look at their books to see precisely what is going on. How about American banks in this crisis -- are they absolutely transparent? You can see precisely what you need to know?
MCDERMOTT: Well, you can't see precisely what you need to know, but you get certainly a better look than you do at our Asian counterparts. And I think that increasingly analysts will put pressure on U.S. banking managements to come clean, as it were, to talk more about the nature of their exposure -- be it loans, swaps, derivatives -- to get this dialogue going because it does matter.
VARNEY: But that's complicated stuff. I mean, how do you tell the precise loss liability that you've got on such a complex transaction in securities?
MCDERMOTT: You can take it one step further, and it gets more complicated because of the nature of the individual borrowing institution that you're dealing with, and the creditworthiness of that institution, and how that institution is impacted by the affects of the economy in its respective country. So it's an issue analysts will be wrestling with in 1998, clearly.
VARNEY: Generally speaking, are you down on the big money center banks over the next six months?
MCDERMOTT: I think that if you're going to be involved with these stocks you're got to be nimble. As I said, there's headline risks. They'll bounce up, bounce down, depending on what news is emanating from that part of the world. But long term these are good stocks. And our view is that this crisis will wash its way out, and in fact be opportunistic for many U.S. banking companies as those economies liberalize in response to this crisis in Southeast Asia.
VARNEY: Right. The other big part of the banking universe is clearly those big new expanding regional banks. They're not that exposed to Asia, I believe. What's their basic financial position?
MCDERMOTT: Well, not only are they not directly exposed -- I mean there may be some impact in the sense that there's a slowdown in the U.S. economy as a result of the Asian influence, but, generally speaking, they're heavily focused on the domestic economy, which is strong. And they are changing the profile of their revenue stream, which is increasingly less dependent on lending and more dependent on few revenues as they acquire asset management firms, brokerage firms, as they broaden their product mix.
VARNEY: Do they have exposure on the trading desks? Because I know frequently their profits are bolstered by trading profits, and they've done well in the last three-four years. Are they exposed there?
MCDERMOTT: The larger regionals would have some trading exposure, but I don't think it's going to be of the emerging market variety. It's going to be more in the U.S. market -- trading U.S. securities -- and not be involved directly in having Southeast Asian exposure, or Asian exposure.
VARNEY: Tell me briefly what's the best run, best managed, best situated, best capitalized regional bank in America?
MCDERMOTT: Well, there are so many of them, Stuart.
VARNEY: Are they all that good?
MCDERMOTT: There are quite a few that are good. I mean, we've got a couple of hometown favorites: Bank of New York is very well managed. It reported earnings today. Asia was not in that profile -- in that revenue profile, bottom line profile. That's a good company and it's been repositioning itself largely in the securities processing area -- good franchise, strong, well managed company. So if you're looking for a hometown favorite, that certainly would be one of them.
VARNEY: Banc One?
MCDERMOTT: Banc One is another one. Again, a national franchise, emphasis on credit cards. Big bet there. Well managed company. We like it. You got a couple in North Carolina: NationsBank and First Union doing a very good job. There are a lot of places to play here. The risk is going to be in the multinational banking companies in the first half of the year. They'll bounce around. If you can't take that heat, then get out of the kitchen. But, clearly, there are other pure attracts to pull the banking sector. And banking profits, we think, will be 10 percent higher in 1998 over 1997.
VARNEY: I met a gentleman who was 95 years old the other day and very wealthy. He said he made all his money by investing in small banks and holding the stock and never ever selling until it was taken over. He was worth a ton of money. Good strategy.
MCDERMOTT: There was a lot of that going on and still will be in 1998. 
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