As the Dow Jones industrial average teetered closer to the 8,000 mark Friday and more banks disclosed losses on Russian securities, most bank analysts said the worry about Russia was overblown.
But they said the fear of emerging-market trouble was severe enough that the market is unlikely to bounce back soon without an intervention by the Federal Reserve.
"Short-term interest rates must either be talked lower or actually lowered to trigger a meaningful recovery in bank shares," said Thomas Hanley of Warburg Dillon Read.
Investors continued to unload shares of banks, and stocks in general, in what one trader hyperbolically said was the worst day in history for bank stocks. "Selling begets selling," he said. "You see two sellers, and the next moment you've got five. People are just piling on. Everybody is trying to get out, and there are no buyers."
Worries that the ruble's devaluation would worsen deflationary pressure globally sent the Dow Jones industrial average down 1.40%, to 8,051.68. The Standard & Poor's bank index fell 2.47%, to 581.35.
News from banks did little to clear the air. BankAmerica Corp. in San Francisco said its losses in July and August were $220 million, slightly worse than expected. BankBoston Corp. reported losses that were far less than some feared, saying it lost $30 million during the period, with $10 million coming on Russian securities.
The Boston banking company said its Latin American operations were doing well.
After the close of trading, J.P. Morgan & Co. disclosed its exposure on Russian securities is $160 million. Trading assets account for $90 million of that. The company would not disclose any losses, though the exposure is far less than the $1.5 billion investors had estimated. Morgan's stock had closed down $7 a share, at $97.75.
Some investors worried the bottom was nowhere in sight for the market. "We have more to go," said John Lee, who heads the hedge fund Hollister Asset Management, Los Angeles. He said the market could fall below where it was at the start of the year, when the Dow was at 7,965.04.
The analysts, meanwhile, said they were puzzled by the extent of the selloff in bank stocks.
Lawrence Cohn of Ryan, Beck & Co., Livingston, N.J.-often a bearish analyst-said bank stock investors "have grossly overreacted to problems in Russia."
About 95% of the $8.8 billion of Russian securities held by U.S. banks is in money-center institutions, said Mr. Hanley of Warburg Dillon Read.
"Regional banks are indiscriminately being punished in this market, with little cause," he said, adding that because most regional banks' earnings would not be hit by emerging markets trading losses, their stocks could provide a "safe haven."
But Mr. Hanley and other experts said a rally was not likely without action by the Federal Reserve.
"The Fed is the cavalry, and one hopes that they are heading over the hill," said portfolio manager James Ellman of AIM Global Financial Services Fund.
By reducing interest rates, the Fed would make short-term assets like U.S dollars and Treasury securities less attractive, spurring investors to turn to foreign assets. The recent flight to quality in U.S. assets has worsened pressure for further devaluation of foreign currencies.
In addition, investors view banks as interest-sensitive and buy their stocks when rates go down.
The Federal Reserve's open market committee, faced by conflicting economic trends, has stood pat on interest rates since March 1997, when it raised the fed funds rate 25 basis points, to 5.5%.
The committee next meets Sept. 29. But analysts said they were hoping for a signal on rates from a conference in Jackson Hole, Wyo., being attended by several Fed governors.
Stocks of multinational banks are reeling from turbulence and uncertainty in Asia, Latin America, and now Russia. Continued investor concern about the proportion of income these banks generate from market- sensitive activities adds to the uncertainty, analysts said.
"The market is recognizing these additional risk factors that in mid- July might not have been fully understood," said Bradley Ball, an analyst at Credit Suisse First Boston.
"The whole notion of deflation is terribly serious," said David De Wind, emerging markets manager at Hollister Asset Management. "It will punish the market and profitability for U.S. firms in the third or fourth quarter."
Mr. Cohn, however, dismissed the notion that Russia economic troubles would spread to other countries or were caused by the economic woes of other countries.
"The Russian economy has been mismanaged for years. It was going to have these difficulties whether there were problems with Asia or not," he said. "The exposures are trivial."
Indeed, analysts said the impact of BankAmerica's trading loss would be blunted by its pending merger with NationsBank Corp. The two companies plan to report third-quarter earnings together, and Charlotte, N.C.-based NationsBank does not have significant overseas exposure.
BankAmerica, with $264 billion of assets, had year-to-date trading income of $315 million. The bank said it pared its Russian holdings from $412 million at June 30 to $100 million at Aug. 26.
BankBoston, with $71 billion of assets, said it trimmed its Russian exposure to $6 million. Much of its losses were in positions in U.S. markets, the bank said.
Analysts had been expecting hundreds of million of losses at BankBoston, but Friday's announcement did little to calm market fears. Its shares fell $3, to $36.
The disclosures came one day after Republic New York Corp. said the $110 million loss in the value of its Russian government bond holdings would effectively erase its third-quarter profit.
Market watchers spent Thursday and Friday handicapping the rest of the field.
Chase Manhattan Corp., which said its exposure was $500 million plus another $500 million in loans to hedge funds holding Russian securities, could have trading losses up to $425 million, Mr. Hanley said. Other analysts put them closer to $200 million.
Citicorp, which said its exposure was $420 million, could have trading losses up to $200 million, Mr. Ball said. Bankers Trust Corp., with yearend 1997 exposure of $1.1 billion, could have $350 million in losses, he said.
For Citicorp, the consequences look much greater, said Mr. Lee of Hollister.
Travelers and Citicorp, set to merge, are focused on building a worldwide presence, he said. "So people are questioning if they will grow as quickly as expected or if the synergies and cross-selling will happen" as soon with the economic troubles overseas.