Reverberations from Asia's economic turmoil are reaching the bank bond market.
In the last three weeks, bank bond analysts have been steering clients clear of money-center institutions' bonds in favor of those of lower-rated or smaller banks.
Since the troubles in Korea surfaced, spreads on bonds issued by money- centers or other banks with exposure to the region have widened by a substantial 15 basis points, said bank bond analyst Eric Grubelich of Keefe, Bruyette & Woods Inc.
"It's not really shocking that spreads on money-center bonds have widened, considering the exposure that they have," Mr. Grubelich said. "We have been pressing the case for smaller regional banks."
Money-centers may be losing their "must have" status. In addition to their exposure to Asia, the biggest U.S. banks' ratings are "starting to reach their peak," Mr. Grubelich said in a recent report.
Smaller banks are better bets for 1998, he said, because they are less exposed internationally, have takeover potential, and are more likely to get upgrades because they have "been generally neglected by the rating agencies."
Some of Mr. Grubelich's picks for the new year include Keystone Financial in Pennsylvania, Hubco in New Jersey, M&T Bank in Buffalo, Union Planters in Tennessee, and Old Kent Financial in Michigan. Their ratings range from Ba2/BBB-minus to Baa1/A-minus.
Analysts say financial institutions that do a lot of business with companies focused on the U.S. should fare better next year.
Also appealing are banks that lend to companies that import from Asia, said Greg Mount, an economist with First Chicago NBD Corp. "Import prices will come down and the companies' bottom lines will shoot up," he said.
Conversely, banks with ties to companies that export capital equipment could be hit by a global economic slowdown, even if they do not directly make loans in Asia or Latin America.
Bank bond analyst Ethan Heislar at Salomon Smith Barney recently recommended that clients under-weight their portfolios in money-centers for the next six months.
He has been recommending North Fork Bancorp, Green Point Financial, Long Island Savings Bank, and Union Planters.
According to Securities Data Co., banks have issued $10.7 billion of bonds in December, up from $5.1 billion in November, and $6.8 billion in December 1996.
Leading issuers included BankBoston, which issued $200 million in 10- year subordinated notes; Norwest, $100 million in 10-year debt; and SouthTrust Corp., also $100 million in 10-year debt.
"Bank bond issuance will increase as long as banks continue to grow," Mr. Heislar said.
Citicorp last week filed a $5 billion debt shelf registration with the Securities and Exchange Commission. SouthTrust did the same for $600 million earlier in the month.
Big banks are not likely to be completely abandoned, experts said.
"There is a general desire for quality,"said Mr. Mount of First Chicago NBD. He said that money-center banks are still perceived as being among the strongest companies in the U.S.
