Subprime spells gloom, not doom, for Asia banks
Reuters
Singapore and Tokyo, Japan
Friday, 4 April 2008
Investors may have a nervous eye on Asia after the subprime crisis tore through the United States and Europe, but while the region's banks will see losses on risky investments, they won't be facing doomsday.
Investors have punished Asian financial stocks, concerned that somewhere in the region a big bank may be at the edge of collapse. Yet lenders are unlikely to be lacerated by the losses that hit UBS, Bear Stearns, Merrill Lynch and others, analysts say.
Investments related to troubled United States housing loans have cost global financial institutions as much as US$215 billion (S$298 billion) as of December, but less than 7% of that has come in Asia, according to estimates by Japan's regulatory Financial Services Agency.
'They are nowhere near as embroiled as the large US and European banks,' said Mr Jason Rogers, a credit analyst at Barclays Capital in Singapore who looks at banks across Asia.
'Their exposure mainly comes through their investment portfolios, as opposed to part of their core business. They were not in the practice of slicing and dicing and underwriting the US RMBS-type products,' he said.
Mr Rogers said Mizuho Financial Group was one of the only Asian banks to attempt to arrange products such as residential mortgage-backed securities (RMBS).
RMBSs and other structured instruments such as collateralised debt obligations are securities backed by a pool of loans or bonds with differing risk profiles but which plunged in value when the US housing market tanked.
Mizuho, Japan's second-largest lender, is now one of the region's biggest subprime casualties, so far reporting 345 billion yen (S$4.6 billion) in losses. Still, that's just a sliver of the US$37.4 billion written down by UBS and Merrill's US$24 billion write-down.
Mizuho expects to report a net profit of 480 billion yen for the year that ended in March. By contrast, UBS reported on Tuesday a net loss of US$12 billion for the first quarter alone.
Merrill has turned to outside assistance for capital relief, including a US$1.2 billion injection from Mizuho.
Watching exposure
Asian banks rated by Standard & Poor's have a total exposure of about US$34 billion to structured instruments, reckons Mr Ritesh Maheshwari, a credit analyst with the ratings agency.
'Considering that the total shareholder equity of these banks is nearly 10 times this amount, the likely write-downs can be easily absorbed,' Mr Maheshwari said in a note to clients.
Japan's subprime-related exposure is estimated at 1.5 trillion yen by the Financial Services Agency, less than half of what UBS has so far written down.
Yet investors remain largely unconvinced. Tokyo's banking index has fallen 30% in the last 12 months, and Singapore's index of financial stocks is off about 11%.
Both have fared worse than their broader markets.
Shares of Bank of China have fallen about 11% over the same period while the FTSE index of global banks has lost about 18%.
Bank of China, so far the hardest hit among big Chinese banks, said it held US$5 billion worth of asset-backed securities that were related to the subprime market.
A lot of investor frustration is due to poor disclosure, because Asian banks don't need to be as precise as their US rivals when revealing subprime holdings, said Ms Kristine Li, banking analyst at KBC Securities in Tokyo.
'Many banks say, 'We have this much in RMBS, but they are all triple-A rated so it's safe'. What do you say? You don't know if it's safe or not,' Ms Li said.
Just holding on
Some banks, such as Tokyo's Mizuho have been aggressive about marking down their holdings, while others, such as Mitsubishi UFJ Financial Group are taking a wait-and-see approach, said Mr Graeme Knowd, banking analyst for CLSA Asia-Pacific Markets in Tokyo.
Mr Knowd is particularly cautious about MUFG, Japan's largest bank.
'When the problem moves from subprime to just other stuff, they have more than anyone else (in Japan),' he said, referring to an estimated 3 trillion yen parked in structured credit products outside of Japan.
And thanks to the subprime-inspired market downturn, even lenders with no direct exposure to US mortgage products are being squeezed.
Resona Holdings, Japan's fourth-largest bank, said it would miss its fourth-quarter revenue target due to worse-than-expected sales of investment trusts.
The bank, which relies heavily on its retail operations, said sales of investment trusts - products similar to mutual funds - fell about 40% in February due to poor market performance.
At a recent news conference, the bank's chairman, Mr Eiji Hosoya, might have been speaking for banks across the region when he made a glum prediction.
'The next business year will likely be even tougher.'
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