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Banks clean up own mess
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August 27, 1998: 10:56 a.m. ET
Consumers unlikely to pay for banks' earnings losses in Asia and Russia
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NEW YORK (CNNfn) - Bank stocks may be feeling particularly picked on these days, taking the greatest hit during market turmoil, but at least their customers won't be paying for their troubles.
While very few sectors have been safe as the market absorbs wave after wave of massive sell-offs, investors have saved particular fury for the banking and financial sector.
The ones hurt the most have been the biggest names in the industry. Citicorp (CCI) is down about 50 percent from its 52-week high. Close on its heels is Chase Manhattan (CMB), 48 percent off its 52-week high, along with J.P. Morgan (JPM), about 43 percent off its high.
The problems started for banks last year as the shaky financial situations of many Asian countries were brought out into the spotlight.
For example, some banks in Japan and elsewhere were using accounting sleight of hand tricks to cover up massive losses from real estate and other ventures.
On top of that, countries like Thailand and Indonesia because of debt problems found themselves unable to continue propping up their currencies.
The revelation of these problems clouded the overall financial picture of a region which was once considered a financial and commercial area expected to provide a strong market for many U.S. companies' goods and services.
Some of the U.S. money center banks had particular exposure to the region, most notably J.P. Morgan and Citibank, along with Bankers Trust (BT). Banks with the greatest exposure consequently paid for it more dearly in their earnings results.
Recently, Russia came along and made its addition to the volatile mix. On Sunday Russian President Boris Yeltsin fired his previous prime minister Sergei Kiriyenko and reinstated Viktor Chernomyrdin.
Yeltsin also unveiled a short-term debt repayment plan that ignored international investors' concerns. Russia's currency, the ruble, suffered accordingly, as did U.S. banks that do business there.
Republic New York, the parent company of Republic National Bank of New York, announced Thursday it is valuing its position in restructured short-term Russian Treasury bills at 15 cents on the dollar. It also said it would take a charge of $110 million for the third quarter.
Footing the bill
When banks face earnings losses due to problems in Russia or in Southeast Asia it would seem likely at some point consumers, as often happens elsewhere, would end up footing the bill.
However, most banks have usually prepared for the vagaries of the financial markets by diversifying into many other areas in order to contain the effects of international turmoil, said Fritz Elmendorf, vice president of communications for the Consumer Bankers Association, a Washington-based retail banking trade group.
"Banks have various sources of earnings," said Elmendorf. "If a bank is large enough to have international operations, it has evolved enough diversification to counteract those losses."
The situation might not be that clear, however, according to banking analyst Bert Ely, head of Ely & Co. "We'll never know how they pay for those losses. The banks don't necessarily know either," he said.
"These banks have so many independent revenue streams from various countries and product lines. It's not as if they take a hit in one area and push a button in another area."
There are things that do work in consumers favor however. Ely said many banks' divisions operate almost as separate profit centers within the overall firm.
One unit would probably be quite resistant to raising its fees or interest rates -- and jeopardizing its bottom line -- in order to pay for the troubles of another unit.
Additionally, many U.S. banks operate only regionally within their sections of the country, with little or no overseas operations.
"Most banks haven't had those overseas losses. It would be hard for one bank to push up their rates if no one else is," said Ely.
Ultimately, these banks are paying the price in the stock market. Unfortunately for the regional banks, investors are showing little differentiation between those who are exposed internationally and subject to losses and those that are not.
For example, in the wake of the Russian financial troubles, bank stocks almost across the board were markedly lower, even though U.S. banks' exposure to Russia is a relatively modest $7.7 billion.
Regional U.S. banks like Wells Fargo (WFC) and Bank of New York (BK), which have very little international operations, have been stung along with the international giants like J.P. Morgan.
-- by staff writer Randall J. Schultz
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