Renewed weakness in the Latin American economy, in particular Argentina, has concerned the broader market in recent weeks, but analysts are predicting no blow-ups among U.S. banking companies with exposure in the region.
The exposure of U.S. banks to the region is limited, and the economic situation in Latin America should have less effect on the companies earnings than the current downturn at home, wrote Judah S. Kraushaar, an analyst at Merrill Lynch & Co. in a note to investors Thursday.
Citigroup Inc., FleetBoston Financial Corp., Bank of America Corp., and J.P. Morgan Chase & Co. are the main U.S. companies with exposure to Latin America. Cross-border exposures range from $2.5 billion at Bank of America to $15 billion at Citigroup, Mr. Kraushaar wrote.
The broader credit cycle in the U.S. and the slowdown in capital markets remain the key influences on these firms stock prices, he wrote.
Concerns over whether Argentina can pay off its debt have rattled investors recently. Standard & Poors downgraded the countrys debt Thursday to B-minus, from B, with a negative outlook, and Moodys Investors Service downgraded its government bonds Friday to B3, from B2, also with a negative outlook. In total, U.S. banks hold $8.9 billion of loans to Argentina, according to Scott J. Brown, economist at Raymond James & Associates Inc. in St. Petersburg, Fla. FleetBoston and Citi also operate retail branches in Argentina.
A spokeswoman for FleetBoston said the company is monitoring the situation but noted that just 3% of its earnings come from Argentina.
U.S. banks, with a significant presence in Argentina and more broadly speaking Latin America, are well prepared to benefit from further capital markets turmoil and/or an economic rebound in Latin America, wrote Andrew B. Collins on May 3 in a report prepared for ABN Amro North America Inc., his employer at the time. On Friday, speaking from his new post at U.S. Bancorp Piper Jaffray, he said that since the May report little has changed but that the level investors concern has risen.
Argentina is a big problem, he said. But it has been a problem for three years. He said he is confident that the management at U.S. banks in Argentina should be able to weather any problem.
However, the economic environment in Argentina could get much worse before it improves, warned Mohamed A. El-Erian, head of the emerging market portfolio management team at Pimco in Newport Beach, Calif. Day by day it becomes more unlikely that they can avoid default.
Both operations and loans would be affected if Argentina defaults, and the crisis might spill over to Brazil because many investors hedge their Argentina exposure through its northern neighbor, Mr. El-Erian said.
FleetBostons shares fell 1.2% Friday, but Morgan Chase rose 0.02%, Bank of America 1.38%, and Citi 0.33%. The American Banker index of 225 banks rose 1.23%, and the Standard & Poors 500 index was up 0.62%.