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Asian flu threatens high street banks as debts are revealed

British high street banks' exposure to the troubled South-east Asian region runs into billions of pounds, according to a leading investment bank. As Lea Paterson reports, the Asian crisis could spell an end to the current bull run in European bank stocks.

Barclays Bank and NatWest Bank each have an estimated pounds 1.2bn exposure to Korea, Indonesia and Thailand, while Lloyds Bank has an pounds 800m exposure, according to an analyst's note published last week.

Stock markets have concentrated so far on the impact of the crisis on American banks and those with strong Far Eastern links, like HSBC Holdings and Standard Chartered. But Britain's high street banks are also embroiled in the region, according to John Leonard, banking analyst at Salomon Smith Barney, the US investment bank.

In recent months UK-based bank stocks have soared on the back of restructuring and consolidation within the industry. But, as stock market awareness of banks' exposure to the region increases, investors should be prepared for "Asian flu" to spread throughout the European banking sector, according to Mr Leonard.

The analyst said: "Exposure to Asia is quite broadly spread across the industry. But the degree of reaction in the market is at variance with the degree of the exposure".

Salomon Smith Barney estimate the total exposure of leading British banks to Korea and Indonesia to total $9.9bn (pounds 6bn). Mr Leonard believes banking exposure to Thailand to be roughly similar to that of Indonesia, taking British banking exposure in the three countries to almost $14bn.

To date, most European banks have failed to provide details of their exposure to troubled South-east Asia.

"Estimating the potential provision exposure of individual banks remains an art, given limited disclosure of both the total amount and the composition of outstanding credits," said Salomon Smith Barney.

The magnitude of the exposure to Korea and Indonesia alone could lead the British banks to post 1997 provisions of up to pounds 100m, according to the Salomon Smith Barney note. All the large British banks are scheduled to report 1997 profits within the coming weeks.

Bad loans are just one of a number of implications of the Far Eastern crisis for the financial health of the European banks. Banks should also be braced for a sharp downturn in profitability in their Far Eastern investment and wholesale banking activities.

Salomon Smith Barney said: "There is little question that securities market volumes and fees from this region will decline sharply in 1998; managing costs down as rapidly seems impossible."

A handful of leading banks - mostly in the US - have admitted the Asian crisis has hit investment banking profits. These include Chase Manhattan, which made a trading loss of $160m (pounds 94m) in October because of volatility in the emerging markets.

A wave of consolidation helped European bank shares to outperform the market for much of 1997 and to number among brokers' top tips for 1998.

But prospects for the banking sector began to sour last week as Moody's, the influential US credit ratings agency, announced it could downgrade a number of European banks because of their exposure to South-east Asia.

With the exception of HSBC and Standard Chartered, which both have strong links to the troubled region, British bank shares have so far emerged relatively unscathed.

Provisions for the Asian crisis should be able to be contained easily within the current earnings of European banks. Barclays made a profit of over pounds 2bn in 1996. NatWest earned more than pounds 1bn in profit.

Bank exposure to Korea & Indonesia (estimated)

Total exposure Provision

HSBC Holdings pounds 2.0bn pounds 240m

Standard Chartered pounds 1.7bn pounds 190m

Barclays pounds 0.9bn pounds 100m

NatWest pounds 0.9bn pounds 100m

Lloyds TSB pounds 0.6bn pounds 60m

Source: Salomon Smith Barney