The effect of Asian fiscal crisis on big-nation banks is uncertain

The Outlook

December 21, 1997|By Stephen Kiehl and Jay Hancock

THE ASIAN financial typhoon that started in Thailand last spring has now swept across a hemisphere, cut currency values by as much as half in some emerging economies and prompted sporadic nail-biting about world stock values.

Most of the worries about Asia have focused on currencies and industry. Analysts worry that stricken Asian economies will stop buying goods from the developed world. And they're even more concerned that devalued currencies will let Asian producers flood the globe with cheap products, stealing market share and profits from Western manufacturers.

But little attention has been paid to the one sector that makes the others possible: banking. During the 1970s and 1980s, developed-nation banks made billions in loans to emerging economies only to face a crisis of defaults and writedowns later on.

Japan is widely cited as being on the hook for huge loans of dubious quality not only domestically but to developing nations as well. But what about the other big-nation banks? Are their loan portfolios hiding emerging-nation time bombs?

Steve Hanke

Professor of applied economics, Johns Hopkins

No one's really paid any attention to the banks. To the extent that people have focused on anything, they've just looked at trade flows. But if you look at banks more closely, France has $41 billion, or 3.6 percent of their gross domestic product, tied up in emerging-market bank loans. Germany's got $63 billion. That's about 3.1 percent of GDP. The United Kingdom has $46 billion; that's about 3.6 percent of GDP.

Japan, which of course has the most troubled banks, also has $186 billion in exposure to emerging markets. That's 4.5 percent of GDP.

These are big numbers. And as a percentage of bank profits, they're absolutely enormous. All of that's not going to be lost, but even if you get a 50 percent markdown, you're talking about very large numbers.

The United States, after getting their fingers burnt royally in the 1980 Mexican fiasco, have only $53 billion in emerging markets, and that's about 0.7 percent of GDP. It will hit some of the U.S. banks to some extent. They'll have to pump up their loan loss provisions on those and it's going to hurt the international banks that have international loan exposure.

The problems in Asia mean that the opportunities for new loans there are going to be completely cut off because they already have excess capacity. And as far as old loans go, the provisioning for loan losses has been completely inadequate, which means you're going to get a negative effect on the profits to banks in countries that have good exposure.

The bottom line is, this is a much bigger problem than most

people think. They just don't get it.

Michael Ancell

Banking analyst, Edward Jones

Are U.S. banks at risk? The banks themselves, no. There are some banks whose earnings in 1998 might not be as good as we expect. Citicorp gets about 20 percent of its business from the Asian Pacific region. Bank of America has about 8 percent from that region. So there is a risk to their '98 earnings -- not that they won't have any, just that they'll have less than people thought.

Finally many [Asian] countries have opened their financial services markets to competition. The U.S. has the strongest financial companies in the world and this is a huge opportunity for our companies. Asian countries need our capital, our management expertise, and they need to model their economies on the U.S. more than ever. It's a great opportunity for U.S. financial companies to grow internationally.

Dave Allman

Research director, Elliott Wave International

Even if U.S. banks don't have direct exposure, they can still be affected by a domino effect. Just as it was wrong for California to laugh at the rest of country when everyone else was having real estate problems, it would be wrong for domestic banks to look over there and say, "That's an Asian problem, too bad for them. But we're the U.S., we're OK." It's a cavalier attitude to assume that those problems focused in the Asian area will be restricted to the Asian area.

The average person on the street will see an effect when the overall economy is hindered, as it was in 1989, 1990 and the banks had problems.

Citicorp traded as low as $7 a share in 1990. It's $132 today. Management is not 18 times smarter than it was then. It's market forces. People feel pretty good for whatever combination of reasons that things are OK, just like people in Asia did prior to the events of a few months ago.

Charles M. Vincent

Financial analyst, PNC Bank Corp.

The answer of course is yes. But the degree is what you're trying to figure out. It depends upon the individual banks and their customer base.

A large, multinational bank with extensive operations in the Far East is probably going to see some effect. Citicorp will see some modest effect, as will Chase and Bank of America. But it will be modest. The effect will be much more to Japan, Australia and New Zealand. It's the same situation for European banks [as for American banks].

To date, I haven't seen anything that you would call life-threatening. If this degenerates into a world crisis, then everyone's going to be affected. But that won't happen. The whole thing is containable.

Pub Date: 12/21/97

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