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Bank profits react to Asia
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January 20, 1998: 3:24 p.m. ET
Latest quarterly results reflect varying degrees of pain from Pacific Rim crisis
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NEW YORK (CNNfn) - The notion that bigger is better in the banking industry is being challenged by the latest earning results, with many multinationals suffering more than their smaller brethren because of Asia's financial troubles.
J.P. Morgan shares (JPM) were among the hardest hit Tuesday, dropping 3-3/8 to 103-1/2 after the company registered fourth-quarter earnings of $271 million, or $1.33 per share, far below Wall Street estimates of $1.57 per share. The earnings were a shocking 35 percent lower than the company's results for the same period in 1996.
Chase Manhattan reported that it made $874 million, or $1.89 per share, in line with expectations. As a result, its stock (CMB) fared better, rising 3/8 to 105-7/8 after falling 2 in earlier trading.
Citicorp shares (CCI) fell 1/4 to 119-5/8 despite the fact that its fourth-quarter earnings were $1.1 billion, or $2.20 per share, beating expectations of $2.18 per share.
The major banks blamed a weakening Southeast Asian market for some of their woes. As Southeast Asian currency values have plunged ever lower, it has had the resulting effect of hurting earnings of companies doing business there because local investments become worth less money.
Banks are often reluctant to state the exact damage, but Citicorp Chairman John Reed did step forward to say that changes in monetary exchange rates hurt quarterly earnings by more than $100 million. Reed added that Citicorp lost another $90 million related to the increasingly sharp market swings in that region. "It was anything but a normal quarter," he said.
J.P. Morgan was more elusive, saying it has designated about $587 million of its Asian investments as "nonperforming."
In recent weeks, the multinational banks have faced a double-whammy. Investors have worried about bank earnings, not only in Asia but at home as well. The reason: a flattening yield curve. Recently, the difference between the rate at which banks can borrow money and the rate at which they lend money has narrowed, cutting into banks' earnings.
Any hopes of a turnaround for the banks may have to wait. Many analysts predict that the Asian financial situation will continue to put a drag on banks' earnings for at least the next two quarters.
"We want closure to this thing, but something as big as Southeast Asia is not going to get closed off very quickly," said Vincent Farrell, chief investment officer at Spears, Benzak, Salomon & Farrell.
"We're going to have to wait a little while before we see the full impact."
Little giants
While the larger multinational banks struggle to deal with their Asian holdings, smaller U.S. banks have been quietly going about their business much less affected by what is happening across the Pacific.
Regional U.S. banks like Wells Fargo (WFC) and Bank of New York (BK) are concerned about Asia only inasmuch as it affects the economy of the United States, where they have the majority of their investments, said banking analyst Jim McDermott of Keefe, Bruyette & Woods.
"You have to have a dichotomy between those U.S. multinationals that have a direct exposure [to Asia] and the large majority of regional banking companies that reflect the strong U.S. economy and that are hitting their numbers with regularity," he said.
Indeed, Bank of New York released its fourth-quarter results Tuesday showing a record net income of $298 million, or 75 cents per share, without mentioning the word "Asia" once.
Regional banks have also been undergoing a sea change in their strategies, with many focusing less on lending and more on fee revenues as they acquire asset management firms and brokerages, broadening their product mix.
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