US bankers pulling in the reins on international loans

Maybe when they are overseas, American bankers wear pin-striped jogging suits. They certainly have had to move at a fast clip in recent years, running to keep their international operations ahead of increased competition in markets where US banks once dominated, economic hard times in many parts of the world, and reduced profits on loans.

As a result, international banking, once considered de rigeurm for any major US bank -- and some minor ones -- is going through a period of intense reevaluation. This process includes questions about whether the banks are making potentially risky loans at low interest to emerging but still struggling nations, and an actual pullback from some markets.

At Bank of America, for instance, many of the branches in Europe have been eliminated or turned into simple loan offices. And Samuel Armacost, the bank's president -- who did much of his career-climbing in europe -- reportedly thinks more of the bank's overseas offices should be trimmed.

Much of the bankers' recent misgivings about running on the international track centers on their "spreads," not a widening of their waistlines, but the difference between what bankers pay to acquire funds and what they charge customers to use the funds. The bigger a bank's spread, the fatter its profits on loans, so even a minor change in spreads is important.

"There's no doubt about it," says John C. Haley, executive vice-president at the Chase Manhattan Bank and chairman of the American Bankers Association's international banking division. "The spreads on international loans have narrowed considerably in the last three to five years."

He speaks from experience. His bank reported a 1.76 percent spread in 1978. But in 1979, this dropped to 1.66 percent and to 1.25 percent last year.

These reduced spreads are also showing up in overall profit statements. Thomas H. Hanley, banking analyst at Salomon Brothers, estimates banks' overseas profits will rise 12 percent this year, a big drop from last year's 20.1 percent increase and somewhat lower than the 13.3 percent growth rate chalked up from 1976 to 1980.

So why do so many bankers stay in the international business?

"Many international bankers are still in it simply to keep their loan portfolios afloat," says Robert Avila, chief economist with Sage Associates, a corporate financial planning firm. "They are rescheduling loans, refinancing them, whatever they can to keep these loans afloat."

At the same time, analysts note, there are a number of countries with emerging, growing economies that bankers consider attractive places to make loans, and increase future profits. Some of these nations are still considered "less developed countries" (LDCs), but for them, it is a "borrowers' market," and bankers from many countries are lining up to make loans. However, to win the business, they are offering much more favorable loan terms than they would have just a few years ago. The loans many be "safer," but they are less profitable because they are paying lower interest.

Most of the countries mentioned by bankers in this category are located in the "Pacific rim," and include South Korea, Japan, the Philippines, Indonesia, Malaysia, Singapore, and Australia. "Singapore never heard there was a recession," Mr. Haley says.

"There is a 'tiering' that has been going on for the last few years," explains Richard Puz, executive vice-president of Bank of America's world banking division. Two tiers have developed, he says. The first consists of those emerging, fast-growing countries that are paying lower interest rates but, it is hoped, will be able to repay their loans on time without having to have them refinanced on more lenient terms.

The second tier consists of countries considered higher risks. For them, the spreads have widened as banks tried to protect their invetsments. This category includes nations like Brazil, some in Central America, and a few in Europe.

While many bankers profess not to be concerned about lower spreads and reduced profits, Federal Reserve Board member Henry C. Wallich is.

The banks are "lengthening their balance sheets and not earning enough to support the additional capital they need," he said in an interview. "Last year, their capital ratios were up, but broadly speaking, the trend has been down."

Mr. Wallich is particularly concerned about the size of the debt to many of the world's LDCs.

"I think [LDC debt] is building up to levels that are increasingly hard for countries to bear," he asserts. "The ratio of debt to exports, of debt to GNP [ gross national product], or debt service to exports is creeping up for most of these countries."

Also, Wallich said, increased export revenues can be illusory. Just because a debtor nation increases its exports does not mean it will be able to pay off its bank loans any sooner. Much of the proceeds from these exports, he pointed out, have to be used to pay for continually rising oil prices, which have been a much heavier burden for LDCs than for industrialized nations.

It was those oil revenues, bankers note, that helped get international banking rolling at its present hectic pace. After the 1973 oil embargo, the cash-rich oil-producing nations deposited their loot in the world's money center banks, making it available for an increase in bank loas portfolios.