When Banks Diversify Internationally

Bloomberg is running a 2,000-word story today on how Bank of America and other banks with little in the way of international diversification are likely to underperform the multinational US banks this earnings season.

Demand for financial services is increasing three times as fast outside the U.S., fueled by companies and investors in Brazil, China, India and Russia...
With Europe and Asia accounting for more than half of the world's economic output and home to six of every 10 millionaires, the banks and securities firms that expanded internationally stand to benefit most...
Analysts surveyed by Bloomberg estimate that New York-based Citigroup, led by CEO Charles Prince, increased earnings by 7.7 percent, and JPMorgan, which gets a quarter of revenue from outside the U.S., had a 6.4 percent gain. Bank of America may post a 2 percent profit drop, its first decline since 2005, the survey shows.
The situation is already playing out on Wall Street, with Lehman Brothers Holdings Inc. generating almost all of its $1.1 billion increase in second-quarter revenue from international markets. Lehman, the fourth-largest securities firm, said profit increased 27 percent in the three months ended in May.
It was a different story for Bear Stearns Cos., which relied on the U.S. for 87 percent of last year's business. Chief Executive Officer James E. ``Jimmy'' Cayne, who resisted the pressure to expand in investment banking and trading overseas, reported a 10 percent drop in profit as mounting home-loan defaults in the U.S. hurt trading.

It's true that the rest of the world is seeing more growth in demand for financial services than the US is. It's true that there are lots of global millionaires these days (and that the world's richest man is Mexican). But would it be too much to note, in the course of such a long article, that the dollar is incredibly weak these days?

Any US bank reporting in dollars but earning in pounds or euros or just about anything else will see a spike in income as the dollar falls. Yes, most large financial institutions have sophisticated FX hedging strategies. But over the long term, exchange rates matter.

I have some sympathy for Bank of America CEO Kenneth Lewis, who is quoted as saying that "we do better when we play to our strengths, and our strengths are in the U.S." No company can diversify nearly as easily as an investor, so if investors want international exposure, it's just as easy to buy a combination of Bank of America stock along with, say, Spain's Santander as it is to buy a single international stock such as Citigroup or HSBC.

On the other hand, Bank of America has let a lot of strong international franchises wither on the vine, especially those of BankBoston and the legacy BofA, before it got bought by Nationsbank. If it had spent a bit of effort understanding and nurturing those businesses, rather than cutting them off because it didn't understand them, it would be in better shape right now.