Obituary for Foreign Exchange Proves Premature Amid Volatility

U.S. banks are experiencing a dramatic revival in foreign exchange businesses that were considered moribund earlier this year.

Currency volatility in the second quarter combined with banking industry consolidation and expanding global asset management contributed to sharp revenue gains at institutions including Citicorp, Chase Manhattan Corp., and BankBoston Corp.

"Foreign exchange has clearly become a commodity product ... but there is still a need for it," said James Borden, managing director of global foreign exchange at BankBoston. "There's certainly going to be a significant amount of opportunity going forward."

The bullish outlook at BankBoston and other U.S. banks marks a sharp turnaround from last year and early this year, when many banks were cutting staffs as profit margins thinned and European currency volumes declined in anticipation of the 1999 target for establishing a single European currency.

With foreign exchange responsible for as much as 5% of revenue at some U.S. banks, the falloff and its profit implications were not taken lightly.

It was also feared that advanced electronic foreign exchange brokerage services would cut sharply into revenues at the big traditional market makers. This development prompted many banks to start trimming trading staff.

"The big surprise was that disintermediation did not have as much an impact as was feared," said Chris Mandell, deputy head of global foreign exchange trading for BankAmerica Corp. in New York.

An even bigger factor, he said, "was stronger volatility. Volatility creates opportunities, and trading profits are up as a result."

Not only has the dollar surged against major European currencies like the German mark over the last few months, but also several actively traded Southeast Asian currencies like the Thai baht and Malaysian ringgit have suffered sharp drops against the dollar after intense market speculation.

In addition, acquisitions made some banks' currency trading businesses bigger. BankBoston picked up a large number of foreign exchange customers from its merger with BayBanks Inc., while Bank of New York did the same by buying the securities custody business of J.P. Morgan & Co. and other such units.

Growing international investments are also creating demand for foreign exchange hedging products.

As a result, revenues from foreign exchange surged by 88% in the second quarter at Chase Manhattan, to $175 million, and 45% at Citicorp, to $311 million.

Major U.S. banks are the biggest in the world in foreign exchange trading. During the second quarter, foreign exchange trading accounted for 5.4% of total revenues at Citicorp, 5% at BankAmerica, 4% at J.P. Morgan, 2.3% at Chase, and just under 2% at Bank of New York.

J.P. Morgan was the only one of those that registered a decline in second-quarter foreign exchange revenues. A company spokesman declined to elaborate on the results, but market sources said the decline was due to losses in trading for its own account.

"We've increased our client base through acquisitions, especially in the custody business, and we've increased the number of risk management products we offer," said Paul Leyden, senior vice president and spokesman at Bank of New York.

"Portfolio rebalancing resulted in more transactions and greater volatility in currency markets, increased forward hedging activities, and market opportunities," State Street Corp. noted in its quarterly report.

The revenue gains have encouraged some banks to develop foreign exchange further. In September, for example, BankBoston is planning to launch a combined dealing and back-office settlement system that, Mr. Borden said, will let the bank expand its operations.

"We think we can be a credible alternative to the money-center banks and can provide our customers with a broad range of products," he said.

With that goal in mind, he added, the Boston bank is gearing up to increase spot and forward trading, options trading, and trading in Latin American, Eastern European, and Asian currencies.

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