U.S. banks' exposure to Greek debt may be much less than some investors fear, according to an analyst report on Thursday that landed as financial shares were staging a slight recovery from Wednesday's rout.
Nomura analyst Glenn Schorr said U.S. banks have largely hedged their direct exposure to Greek debt as well as counterparty credit risk.
Shares of large U.S. banks have dropped over concerns about a Greek default.
The Bank for International Settlements (BIS) has identified $32.7 billion of credit guarantees written by U.S. banks and brokers. The number spooked some investors on Wednesday, who were further worried by riots in Greece and fears that the country may not be able to pay its obligations.
Yet Schorr pointed out BIS data do not include the hedges that banks have put on since the Greek fiscal crisis erupted last year. Those would include purchasing protection from insurers, demanding collateral and making margin calls.
"While there is definitely some Greek exposure in the U.S. system, we think net exposure at the large U.S. banks and brokers is a whole lot less than the $32.7 billion," he wrote.
On Wednesday major U.S. stock indexes declined 1.5 percent, with financial stocks taking a bigger hit than others. The KBW Bank Index of large-cap banks fell 1.6 percent. But by midday Thursday markets were on the mend, and the KBW index was up 0.3 percent.
While the banks don't have much money directly at risk from loans and derivatives, their stocks have been hit in recent days because investors fear the European debt crisis will indirectly damage U.S. banks' future profits, said analyst Paul Miller of FBR Capital.
Because the crisis is causing losses for debt investors who also provide financing to the banks, the banks' cost of borrowing from those investors is going up.
"Any time the debt guys take some pain, bank stocks will struggle," said Miller. "If your cost of debt goes up, it is harder to make money."
In their most recent quarterly filings, most of the six largest U.S. banks — Goldman Sachs Group Inc., Morgan Stanley, JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. — did not specify their exposure to Greece.
JPMorgan Chief Executive Jamie Dimon recently said his bank's collective exposure to Portugal, Ireland, Greece and Spain had declined by $5 billion since the end of March, to $15 billion. Government loans were less than half of that amount.
"A lot of the exposure is corporate," Dimon said. "We've been doing business in these countries for 75 or 100 years. We are not backing out."
Citi spokesman Jon Diat said the bank's exposure to Greece is "manageable" but declined to provide details. According to the bank's most recent SEC filing, Citi had $256 billion in sovereign exposure at the end of last year, all but 6 percent of it in "investment grade countries."
A spokeswoman for Wells Fargo said the bank had no sovereign exposure to Greece and that its exposure to the country's bank and corporate sectors was "minimal."
Bank of America's most recent SEC filing put its exposure to Greek government debt at $16 million — hedged by $31 million in credit default protection — and $661 million in non-government exposure.
"We have been reducing our exposure to sovereign debt in these countries over recent quarters," bank spokesman Bob Stickler said.
Officials for Goldman Sachs, JPMorgan, and Morgan Stanley declined to comment.
Neither Goldman nor Morgan Stanley identified any exposure to Greece in quarterly filings.
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