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Bank stocks stung by Brazil
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January 13, 1999: 11:31 a.m. ET
Citigroup, BankBoston and BofA shares drop on currency devaluation
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NEW YORK (CNNfn) - Bank stocks took a beating Wednesday morning after the Brazilian government effectively devalued its currency, but analysts say most U.S. financial institutions have learned from the lessons of the past and have defenses in place to weather the storm.
Shares of Citigroup Inc. (C) plunged 5-1/4, or more than 9 percent, to 50-1/2 on the New York Stock Exchange shortly after trading began. BankBoston (BKB) stock tumbled the same percentage, down 3-7/16 at 34-1/4 on the Big Board.
BankAmerica (BAC) shares also slid 4-1/2, nearly 7 percent, to 62-7/16 on the New York Stock Exchange, although those tracking the company say the bank has reduced its exposure to Brazilian investments since it was formed last year through the merger of San Francisco-based Bank of America and Charlotte, N.C.-based NationsBank.
Analysts said while bank stocks should remain choppy throughout the week, their long-term earnings results shouldn't be affected substantially. They noted that banks have long been aware of the financial turmoil brewing in Brazil and have reduced their exposure accordingly.
"This is not the first time the big banks have gone through this there," said Ryan, Beck & Co. analyst Lawrence Cohn. "The main banks of substance there are Citicorp and BankBoston…BankBoston has hedged and Citicorp has traditionally hedged themselves."
Stephen Biggar, an analyst with S&P Equity Group agrees.
"Certainly, stock prices throughout look like they will get squashed on concerns," he said. "But clearly the banks have known they have problems over there and have tried to deal with it. Exposures have been cut back and hedging strategies have been used to deal with the scenario."
To banks with heavy international exposure, Brazil's currency fluctuation may seem like a recurring nightmare.
Half a dozen financial firms took a sizable hit last summer after Russia devalued its ruble and defaulted on its debts. Among them: Donaldson Lufkin & Jenrette (DLJ), Citicorp (CCI), Bankers Trust Corp. (BT), Morgan Stanley Dean Witter & Co. (MWD), British-based Barclays PLC (BCS) and Nomura Securities of Japan.
Bankers Trust said that of the $350 million it lost in July and August, $260 million was tied to investments in Russia.
Republic New York Corp. also told investors last year it would take a $110 million quarterly charge due to losses on its Russian investments.
Brazil rocked the financial markets Wednesday with the surprise resignation of its central bank president Gustavo Franco, a key architect of the country's economic recovery plan. The announcement sent Brazil's real currency down 8 percent against the dollar.
Along with Franco's resignation, the bank said it will effectively devalue the real, valued currently at about 1.31 against the dollar.
Robert Becker, of Argus Research, said several banks, including Chase Manhattan (CMB), reduced their exposure to Brazil significantly in 1998, fearing such an event.
But he noted the long-term impact of Brazil's currency fluctuations will be minimal on U.S. banks.
"I think at some point investors are going to realize that a weak financial situation in Latin America does not really have a huge impact on the money center banks going forward," he said. "It's something they will inevitably work through."
Last week, a group of 12 international banks teamed to form a policy group to develop risk-management practices to help them in times of market crisis.
The group, which includes commercial banks such as J.P. Morgan (JPM) and Barclays PLC, and investment banks like Goldman Sachs & Co., will be set up to mitigate future risks against market instability, such as that created by the debt default by Russia in August and the near-collapse of the Long-Term Capital Management hedge fund in September. 
-- from staff and wire reports
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