More bad news from Russia on Wednesday triggered fears that emerging market problems could hurt third-quarter earnings, sending bank stocks still lower.
Credit Suisse First Boston announced that losses from its Russian bond portfolio would hurt profits by about $254 million, triggering concerns that the recent collapse of debt markets in many emerging nations could hurt earnings at big U.S. banks.
Investors shed stocks of banks that do substantial business abroad. The worst hit were Bankers Trust Corp. and J.P. Morgan & Co., which rely on trading for profits more than other banks. They fell 4.9% and 2.4%, respectively. For the day, the Dow Jones industrial average fell 0.9%.
First Boston's Russia announcement highlighted a developing problem faced by banks that trade and own emerging market debt.
The J.P. Morgan emerging market debt index for Russia has lost 60% of its value in August alone. The composite index for emerging market debt has fallen 22% this month, a worse drop than last October's. Last fall's drop forced many big banks to wrestle with trading losses.
Some analysts said investors over-reacted to the Credit Suisse First Boston news. They said the investment bank's anticipated loss stems from its unparalleled exposure to Russian markets. They add that U.S. banks lend much less to Russian companies than their European counterparts.
Fitch IBCA, a ratings agency, downgraded Russia's currency rating to CCC on Wednesday, saying "there is a real possibility" that the country will default on $140 billion of external debt obligations.
According to the Federal Reserve, U.S. money-center banks have lent $6.1 billion to Russia. Breakdowns by individual banks are unavailable officially, though investment bank Keefe, Bruyette & Woods Inc. estimates BankAmerica Corp.'s exposure is $412 million, Chase Manhattan Corp.'s $500 million, Bankers Trust's $1 billion, and Citicorp's and J.P. Morgan's under $500 million.
German banks, in contrast, have lent over $30 billion, according to the Bank for International Settlements.
The lending data, however, fail to show how many stocks or bonds big U.S. banks contain in their portfolios for their own accounts or their clients.'
"The balance sheet data look delightfully good," said John Leonard, European banking analyst Salomon Smith Barney, London. "The suspicion is they don't show what matters."
Analysts observe that emerging market debt indexes have fallen further than last October, when the composite emerging market debt index fell 16%.
"It probably wasn't catastrophic, but it's naive to think U.S. banks just didn't have some pain," said David Berry, director of research at Keefe, Bruyette & Woods.
In a note to investors Wednesday, Mr. Berry said he expects Chase's loss to be less severe than last year's because the company's appetite for risk has dropped.
The unanswered question is how many Russian securities the U.S. banks have in their portfolios, and what they will do with these hard-to-sell issues.
The rapid collapse of these issues forced Credit Suisse First Boston to announce profits would drop by about $254 million, based on the status of its trading books Tuesday night. The investment bank said it would report profits of about $500 million.
Analysts said other banks' Russia-related losses would likely be lower, because First Boston, a unit of Zurich-based Credit Suisse Group, appears to be in a league of its own when it comes to playing the Russian markets.
The bank started cultivating business there in 1991 and became the only foreign firm to act as primary dealer for Russian treasury bills, according to the firm's 1996 annual review.
Bloomberg News reported that clients of Credit Suisse First Boston account for 40% of the foreign holders of ruble-denominated debt.
Credit Suisse's news represents the second time a big commercial bank has issued an earnings warning because of falling investment banking profits.
Three weeks ago Canadian Imperial Bank of Commerce announced earnings would fall short of expectations. The bank said the chief culprit was the recent fall in fortunes of small and midsize companies served by its investment banking units.
"August is going to be pretty ugly for most," Mr. Leonard said.