The chairman of J.P. Morgan & Co., which recently designated $587 million of Asia-related assets as nonperforming, told an audience of corporate treasurers this week that the region's woes could be worse than they expect.
Growth in the U.S. economy can be expected to slow "materially" in the second half of 1998, as the full impact of the Asian economic crisis becomes more apparent, said Douglas A. Warner 3d, chairman and chief executive officer of the New York banking company. "The Asian influence will be greater than we now imagine."
Certain parts of the U.S. economy have already felt the blow, he said Monday, describing the impact on exporters to Asia as "swift and severe."
But the domestic part of the economy, particularly the service sector, has not seen signs of slowed growth and should continue to be strong through this year, he said.
Morgan has felt the brunt of the Asian crisis because much of its business in recent years has come from the region.
Most of the $587 million of assets designated nonperforming in the fourth quarter were swaps with Asian counterparties. In addition, the bank's fourth-quarter earnings declined 35% from the year before as the result of trading losses from the region.
Mr. Warner's statements, which were part of an hour-long presentation on financial services at a two-day conference in New York of the Financial Executives Institute, were supported by a bank economist.
"There will be a noticeable slowing of U.S. economic growth in the second half of the year, maybe even as early as the second quarter," said Stuart G. Hoffman, chief economist at PNC Bank Corp., Pittsburgh.
Last year, real GDP grew at a rate of 3% to 3.75%, Mr. Hoffman said. This year, it might slow to 2% to 2.5%, he said. That could lead to a slowdown in commercial loan growth, from a 10% pace last year to 5% or 6% by the end of 1998, Mr. Hoffman said.
During a question-and-answer session at the conference, Mr. Warner also explained Morgan's internal restructuring.
In late February, the company announced plans to cut its staff by 5% and to refocus energy on building revenues from investment banking and other client-oriented businesses. Morgan has been working to build its securities underwriting efforts since the early 1980s, and Mr. Warner said it was time to reap the benefits of that effort.
"Our mentality for the last 15 years has been: 'Get in the game, get relevant, chase anything that moves,'" Mr. Warner said. "The time has come when that transition period needs to fade in favor of leadership, returns, profit, and getting more selective in the way we approach the business."
Mr. Warner said his banking company, the nation's fourth-largest, with $262 billion of assets, wants to be in the forefront of changing the way corporations use credit markets. "There is a growing imperative to move toward a new credit model," he said.
The new model-unlike banking's traditional practice of acting primarily as lender-includes the capabilities to originate, structure, and distribute securities.
But the strategy has its disadvantages, said Raphael Soifer, an analyst at Brown Brothers, Harriman & Co. Many banks cannot yet compete in all capacities with full-service investment banks.
"For the model to be effective, the bank has to provide these services in a fully competitive way," Mr. Soifer said.