Is Chase a buy at a $29-billion discount?

Kiplinger's Personal Finance Magazine, Nov, 1998 by Brian Knestout

Standing at ground zero when Russia devalued its currency and the U.S. stock markets cratered were bank stocks with big bets in emerging markets. One of the hardest hit was Chase Manhattan, the nation's largest bank, with about $300 billion in assets. It had at least $150 billion in loans in both the U.S. and abroad, some in chaotic hot spots like Russia, Thailand and Brazil.

Chase's share of the damage came in three salvos. First, $200 million in bad loans, mostly in Russia and Asia, were written off. Next, profits from currency trading for the months of July and August were a meager $160 million, far below the $517-million trajectory set in the previous quarter. And investment income, which registered a $370-million gain in the previous quarter, was a complete wash. As a result, the company's stock price, which had reached a lofty $78 July 31, plummeted by 40%, to $45 per share, by early September. In a little more than a month, Chase had lost $29 billion in stock-market value.

Its predicament is not unusual. Bankers worldwide are forever making imprudent loans. The question investors have to ask themselves is whether the global pandemonium has done its worst to Chase Manhattan, or whether Chase still has some distance to fall.

THE CASE FOR INVESTING

The damage wreaked by Hurricane Ruble could have been worse, as other global banks have demonstrated. Much of Chase's income stream is domestic and is protected from the worst of the storm. For example, one-fifth of its $4.8 billion in second-quarter revenues came from credit cards. Another fifth came from regional consumer banking, home mortgages and other consumer financial products, such as car loans. Profits from these U.S. segments of the company are growing quickly, too; second-quarter earnings increased 17% from a year earlier.

Although profits from global investments are down significantly, Chase isn't expected to touch the $3.6 billion it has in loan-loss reserves, leaving it a sizable cushion against future troubles. The company is also reducing its exposure to foreign markets. Money tied up in Asia at the end of June totaled $13.1 billion, which is one-third less than it had been only six months before. Chase's exposure to Russia has been cut in half.

Chase also has a history of recovery from painful falls. When the Asian markets first imploded, the company took a $160-million write-off for bad loans, which translated into a 19% drop in its stock price. It then turned around to post stellar gains in revenues and profits, and the stock shot to new highs. "Despite taking a hit from Asia last fall, Chase went on to have the strongest first half in the banking industry this year," says Prudential Securities analyst Joel Silverstein. For all its troubles, the bank should still post higher earnings this year, analysts say.

RISKS TO CONSIDER

Chase retains a sizable portfolio of loans and investments in Russia ($460 million), China and Brazil. With Chase's global banking arm producing 73% of its second-quarter earnings, profits are certain to suffer if overseas markets don't stabilize. Moreover, while U.S. operations will stabilize the company, profits from domestic loans and investments aren't projected to grow rapidly.

Where do analysts come down on Chase? Most still like the stock. "Honestly, I don't know when the market will bottom out, but we still recommend Chase as a long-term buying opportunity," says Parker/Hunter analyst Sharada Krishnappa.