Foreign Banks Rethink Plans For U.S. Market
With costs and problem loans on the rise, many foreign banks are beginning to rethink their operating strategies in the United States - so much so that the topic came up at the International Monetary Conference in Osaka, Japan, this week.
"As they recognize the new circumstances, foreign banks will reduce their presence in the U.S. market," First Chicago Corp. chairman Barry Sullivan told the group, adding, "Many will leave altogether."
While foreign bankers deny they are abandoning the United States, it's clear that some retrenchment is taking place.
Japanese banks, hit by sagging profits and fluctuating capital ratios, are drastically reducing new lending, chasing higher margins and fee income instead.
British and Irish banks, finding the United States a riskier place than they had imagined, have trimmed ambitious plans to become regional consumer banking powerhouses.
Playing It Safe
Other European banks are sticking to what they do best. They are expanding only in specialized areas where they believe they have a market advantage, such as private banking, trade and commodity finance, asset management, or securities custody.
Meanwhile, Canadian banks are playing safe and holding U.S. lending to current levels. They remain keen to acquire U.S. institutions but only at bargain-basement prices.
"Foreign banks have concluded that, if they can't make money, they may not be able to afford the luxury of staying on here forever," said County Natwest analyst Steven Berman. "They have their own needs at home. Only a few are seriously looking to expand their businesses here."
Exploiting an Opening
Among the exceptions are the better-rated, strongly capitalized European banks like Union Bank of Switzerland, Britain's Barclays Bank PLC, and Holland's Rabobank Nederland, which are using the opening afforded by tighter lending practices at U.S. banks to build relations with big U.S. corporations.
Yet after more than a decade of unfettered growth, many foreign banks are clearly in a defensive mood.
"I'm not very comfortable with participation banking," said John Tugwell, chairman of National Westminster Bancorp., the U.S. holding company for Britain's National Westminster PLC.
When buying a piece of another bank's loan, Mr. Tugwell pointed out, it can be difficult to know your customers and work your way out when you've got problems.
Mitsubishi Cuts Growth Rate
Said Yutaka Hasegawa, director and executive vice president of Mitsubishi Bank Ltd. in New York: "We've become more conservative, and we've learned to keep our eyes open. We want to know what the potential implications are when we get involved in real estate or structured finance like highly leveraged transactions."
Some foreign banks have paid heavily for heady expansion during recent years, racking up hundreds of millions of dollars in losses on real estate and highly leveraged transactions.
Now, they are moving fast to cut unprofitable operations.
Federal Reserve Bank filings show that new lending by major foreign banks rose 11% in the 12 months ended May 2, down from a 14.4% increase during the previous 12 months.
Reduced Asset Growth
Japanese banks have been especially quick to reduce lending.
"We've switched our policy to much smaller growth," said Mr. Hasegawa.
Growth in U.S. assets at Mitsubishi, he added, is being limited to 4% to 5% this year, down from 15% to 20% two years ago.
Foreign banks are also tightening control over lending offices in smaller U.S. business centers and reducing costs by closing unneeded offices.
"A lot of banks ran into problems through loan production offices," noted Jeremiah Casey, chairman of First Maryland Bancorp, a unit of Allied Irish Banks PLC.
Shutting Superfluous Offices
One of the first things Allied Irish did after acquiring control of First Maryland, he pointed out, was to get rid of offices in New York, Philadelphia and Chicago and concentrate on core business out of Baltimore.
Today, banks like Barclays, Royal Bank of Scotland, Toronto Dominion, and Bayerische Vereinsbank, are following suit, shutting down offices from Atlanta to Seattle and closing unprofitable operations like their primary dealerships in U.S. government securities.
Foreign bankers said they are putting long-term decisions about their future in the United States on hold until U.S. banking reform is completed.
Meanwhile, they said, they want to staunch the flow of red ink, get better returns, and develop more off-balance-sheet business, like asset management, foreign exchange trading, and letters of credit that do not require substantial capital.
"We don't just want a lending relationship anymore," said Anthony Walton, executive vice president in the United States for Australia's Westpac Banking Corp. "We want to know the extent to which a company is prepared to do a broader range of business with us worldwide."