Confronted with a worldwide downturn in financial markets, U.S. banks are beginning to curtail their overseas operations.
While no one expects the banks to mount a full-scale retreat, they are clearly feeling bruised from recent stumbles in Asia, Eastern Europe, and Latin America. As losses on loans, derivatives, and securities holdings pile up, they are moving to cut their credit exposure, pare expenses, and reduce staff.
On Friday, Bankers Trust slashed 30 to 40 jobs in sales and trading in Mexico City.
Citicorp said it may cut its worldwide staff by 5%, and is mulling expense cuts to compensate for reduced revenues. "Every manager of every business has been told to look at their expectations and their costs," a spokesman said.
J.P. Morgan & Co. announced earlier this year that, anticipating difficult markets, it would reduce staff by 5% to keep costs in line with revenues.
Other big financial institutions, such as BankAmerica Corp. and Merrill Lynch & Co., are putting their worldwide operations under review. "If you're asking whether we are reexamining the business we do in emerging markets, the answer is certainly yes," said a spokeswoman for BankAmerica in San Francisco.
Observers think more is to come. "Banks have huge exposure, and they want to get it down," said Charles Coltman 3d, executive vice president and head of global corporate banking at First Union Corp., Charlotte, N.C.
The sudden turnaround in sentiment follows a rapid international buildup by U.S. banks, especially money-centers. Hungry for revenues and fat margins, banks saw opportunity in the fast-growing economies of Eastern Europe, Latin America, and Asia.
Since the early 1990s, banks with an established presence abroad have been pushing beyond their traditional roles in trade finance and cash management into lucrative new activities such as trading and underwriting securities. Meanwhile, newcomers have planted their flags overseas.
The surge in activity is reflected in American Banker's latest survey of U.S. banking abroad. Commercial and industrial foreign-based lending by U.S. banks grew 21.5%, to $139.6 billion, in the 12 months that ended March 31. That is 18% of all C&I loans on the books of U.S. banks.
Total foreign loans were up 13.5%, to nearly $293 billion. Citicorp held $115 billion, Chase Manhattan Corp. $41 billion, and BankAmerica Corp. $37 billion.
But net chargeoffs on foreign loans rose to 0.38%, from 0.05% a year earlier, reflecting the turmoil on world markets.
Bankers and analysts say that after several years of heady growth around the world, the party may be over. Capital markets and credit-related activities may be especially hard hit.
That's because international capital markets activity is declining dramatically as panicky investors dump their holdings in emerging markets, amid heavy losses. This decline has made it virtually impossible for borrowers from Asia, Latin America, and Eastern Europe to raise fresh funds, eliminating a business banks have been cultivating for several years.
"U.S. banks with exposure to international markets, especially capital markets, are hurting," said Robin Monro-Davies, group chief executive officer at Fitch IBCA, the London-based international credit rating agency. "They are scaling back, trimming expenses, and laying off" workers.
Concern over international exposure deepened last week, prompting the Federal Reserve Bank of New York to coordinate a $3.5 billion bailout for Long-Term Capital Management, a $100 billion-asset hedge fund. It suffered massive losses on its worldwide bond holdings, in turn endangering banks it had borrowed from to finance its investments.
Banking sources named investment banks along with commercial banks like J.P. Morgan, Bankers Trust Corp., Chase Manhattan Corp., and BankAmerica Corp. as among the banks worst hit by the crisis and the ones most likely to slash their global capital market activities. Smaller banks, like Republic New York Corp. and BankBoston Corp., are also suffering.
Regional banks, which heavily focus on trade finance, are also trimming operations. Trade with Asia and Latin America has slumped, and banks have grown increasingly concerned about the creditworthiness of Latin companies.
"Most trade finance was with emerging markets, and exports to emerging markets are way down," said a senior regional banker who asked not to be identified. "These countries can't afford to buy as much as they have in the past, and that means trade finance revenues will be under serious challenges for the next couple of years."
Bankers also said big regional banks like NationsBank Corp., Wachovia Corp., and Banc One Corp. that only recently entered the international arena are again becoming cautious about expanding internationally in the future.
"The ones that just got in over the last few years will be the ones who will first back away," said another banker, who also spoke on condition to anonymity.
Still, bankers predicted that banks with large retail operations overseas, like BankBoston and Citicorp, are unlikely to cut back staff abroad unless the economic downturn becomes more extended. BankBoston, in particular, has embarked on an ambitious program to expand its local retail and commercial banking operations ion Latin America.
They also said that banks that focus on securities processing, such as State Street Corp. and Bank of New York, are less likely to reduce staff, because their business has not been hard hit.
In a news release early last month, State Street emphasized that the crisis in Russia and Latin America had made "no significant impact on State Street's revenues and earnings," while events in Asia had made "an insignificant" impact.
"Demand for States Street's services is driven by four long-term trends which underpin its strategic growth." It cited an aging world population, pressure on public pension systems, cross-border investing, and "complex global investment strategies."
Bankers said that in a first step to trim international risks, many began slashing their international credit exposure, including loans, securities holdings, and derivatives contracts, at the beginning of this year.
In the first quarter alone, for example, U.S. banks' cross-border exposure to Japan fell 19%, to $38.6 billion. Bankers across the nation estimated that their international exposure has been reduced by billions of dollars more since then, with some banks reporting hundreds of millions of dollars in cutbacks in credit to regions such as Latin America and large drops in their exposure to Asian countries such as Indonesia and South Korea.
International setbacks are nothing new to U.S. banks. In the mid-1980s the industry lost billions of dollars on lending to Latin America and other economically developing regions. Scores of banks shut down their international operations.
But unlike the 1980s, bankers say this time they are pulling back, not pulling out.
"Most of the players who got into this were pretty experienced," Mr. Coltman observed. "Most won't withdraw like many did last time."
He and others point out that many banks are deeply entrenched in international banking. For example Citicorp, which has the most extensive international network of any U.S. commercial bank, had $115 billion in foreign loans and $157 billion in foreign deposits as of March 31.
Bankers also emphasized they are not about to walk away from long- standing clients overseas. They added that even if the overseas business slumps in some areas, such as underwriting securities, business in other areas, such as bond and stock buybacks as well as mergers and acquisitions may increase, often with those same customers.
They also say economic reforms adopted by Latin America and efforts to restructure financial markets in Asia now under way mean that the current worldwide economic downturn is unlikely to be as long lasting as the decade-long slump that hit Latin America in the early 1980s.
"The fundamentals are a lot better that they were in 1982," Mr. Coltman said.
