U.S. bank stocks were caught on the front line in another market rout Thursday after Republic New York Corp. said losses on its Russian bond portfolio would wipe out its third-quarter earnings.
Republic said it would take a $110 million charge to revalue its $130 million Russian bond portfolio at 15 cents on the dollar.
The news, following the disclosure Wednesday that Credit Suisse First Boston had lost $254 million on Russian securities, focused attention on the financial services industry's exposure there and in emerging markets generally.
The S&P bank index fell 5.73%, the worst drop since a 7.46% decline last Oct. 22, and the S&P 500 dropped 3.84%. The Dow Jones industrial average finished the day at 8,165.99, off 357.36 points, or 4.19%. In percentage terms, it was the Dow's worst drop this year.
Shares of Bankers Trust Corp., which estimated its exposure in Russia at $1.1 billion at the end of last year, fell $8.3125, to $83.8125. BankAmerica Corp., which disclosed $412 million of exposure June 30, fell $3.875, to $73.75. Citicorp, with $420 million of exposure, was off $11.50, at $122.375.
J.P. Morgan did not disclose its exposure in Russia, but analysts said it was in line with that of other major banks. Its shares fell $13.25, to $104.6875.
Banks as a group have lost about 25% of their value in the past six weeks. (Bank executives said they had cut back on emerging market exposure and are still committed internationally. See back page.)
A late wave of selling Thursday caused trading imbalances in Chase Manhattan Corp. Its shares were off $6 to $58.25 at the closing bell.
Trading in Republic's stock was halted for 59 minutes as the news was announced Thursday morning, and its shares eventually fell $4.625, to $45.50.
Analysts have long considered $60 billion-asset Republic to be among the most conservatively managed banks. "It's a shock," said Gerard Cassidy, an analyst at Tucker Anthony Inc. "They were always considered the Rock of Gibraltar."
Scott Edgar, director of research for Sife Trust Fund, liquidated his shares of Republic in January, when they were trading at about $55, but he said the disclosure came as a surprise.
"A lot of investors expected news like that to come out of the money- centers," Mr. Edgar said. "Essentially, Republic is not going to have earnings for the third quarter, and that is just not the news that people want to see in black and white."
Republic derives about 35% of its revenue from private banking, currency and foreign exchange trading, and other fee-generating businesses. The rest come from bread-and-butter deposit taking and lending, analysts said.
Republic's second-quarter profits reached $119 million, up 7.5%. Year- to-date profits were $236 million, up 7%.
In recent years, the bank has been making investments in Russia, analysts said. It has a satellite office in Moscow. Edmond J. Safra, chairman of its Luxembourg-based banking affiliate, Safra Republic Holdings SA, has a keen interest in Eastern Europe, analysts said.
Though its holdings were down "substantially" by the end of June, Republic said its total exposure to Russia stood at $429 million at yearend 1997.
"He's a very successful international banker," Mr. Cassidy said of Mr. Safra. "He probably thought he had a good handle on the situation."
Republic did not have exposure to Asia, and analysts said little is known about its potential exposure elsewhere except that it has a substantial stake in Brazilian Brady bonds.
Though the market was spooked, the volatility in Russia does not appear to have U.S. banking regulators worried.
"The exposures that our banks have to Russia are very small and confined to some of the most diversified institutions that really know how to handle these risks," a senior Federal Reserve Board official said in a background session. "Russia is not a threat to the U.S. banking system or to individual banks."
At worst, losses from Russia will hurt short-term profits at a few banks, the official said.
The official said it was too early to know if the risk-management models bankers use worked. But the official doubted that even the most sophisticated models could have predicted such a steep decline in the Russian currency.
"The problems with models is they reflect your best guess for what you thing might happen," the official said. "I don't think the rapid decline in value of these currencies could have been predicted. It is out of the parameters of what banks were expecting."
A spokesman for the Federal Reserve Bank of New York, which oversees the holding companies for Republic and other money-center banks, said the regulator has not issued any warnings recently regarding Russia.
A spokesman for the Office of the Comptroller of the Currency said his agency is "closely" monitoring developments in Russia, but it has not issued warnings to banks.
Some market experts said Thursday's selling was part of dramatic shift as evidence mounted that the economic turmoil overseas would have real effects on banks in the United States.
"Before the market seemed to go down because of a lack of buyers, but today there appears to be more people actively looking to sell," Mr. Edgar said. In Russia, he noted, "trading has been halted for the last three or four days. The Russian market will not trade tomorrow. The Russian ruble is worthless."
Bank analyst Frank J. Barkocy, of Josephthal & Co., said overseas problems were hurting most U.S. bank stocks. "Our strategist said we should start day wearing helmets and flak jackets. We are looking at a market that has become so focused on the emerging markets in Russia that it has not discriminated between the bank stocks."
Industry analyst Michael L. Mayo of Lehman Brothers Inc. said that the turmoil overseas means that "earnings estimates have to be reduced. If there is a silver lining, this could encourage consolidation; it could shake more apples from the tree."
Meanwhile, merger and acquisition advisers fretted that the selloff in bank stocks would cut into their business.
"Until we find a little bit of stability, it's going to be awfully hard to do any deals," said one. "Selling a company is not a one-day process, and if you talk valuations one day and then three weeks later you're off 15%, it's a shock."
