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Stocks of Singapore-listed bank OCBC, Bank of China and Taiwanese-listed insurer Cathay Financial are expected to feel the heat as a result of their exposure to CDOs, say bankers and analysts.
DBS, which is listed in Singapore, saw its shares fall almost 3% on Tuesday after the bank said its special purpose vehicle Red Orchid Secured Assets had SGD 1.40bn (USD920m) in risky debt, including collateralized debt obligations [CDOs]. The bankers and analysts said banks and insurance companies in China, Hong Kong, Taiwan and Singapore are worst affected, and more banks and insurance companies may reveal the extent of their exposure to the risky CDOs in the weeks ahead.
“Expect more news flow from the banks in these four countries [China, Hong Kong, Taiwan and Singapore],” said a sector banker based in Hong Kong, who has followed the situation closely in Southeast Asia.
“We have not seen the worst of subprime as yet,” warned analyst Sunil Garg, managing director and head of Asia for Banks and Financial Institutions at JP Morgan. He said Chinese banks like Bank of China [BOC] and Industrial and Commercial Bank of China [ICBC] had big exposures to CDOs linked to subprime mortgages in the US, and their shares would feel the turmoil in the weeks ahead.
Garg also said Singapore-based OCBC had a CDO exposure of SGD 650m through its SPV, second-only to DBS, its larger peer in Singapore. A third Singapore bank, UOB, had SGD 352m worth of exposure to CDOs. He said to give a better return to investors, regional banks took on such risky instruments onto their books without paying much attention to the consequences. Garg said with the market becoming volatile due to upcoming quarterly results, the banks’ exposure to bonds and CDOs were exposed. UOB and OCBC declined to comment on the issue.
The Hong Kong-based banker said the two big Chinese banks BOC and ICBC’s exposure to CDOs were far worse than other mainland or Hong Kong banks. BOC’s stock has had a modest reaction so far, when compared to its exposure of USD 9.70bn, the banker said. He said considering BOC’s exposure was the worse than any other Asian bank, its stock was under close watch by asset managers and expected to remain volatile in the coming weeks. BOC shares are now down just under 1% in comparison with last Friday (24 August), but more turmoil is expected in the coming weeks, the banker said. “It is not a good situation to be in [for BOC],” the banker said.
Garg said another Chinese bank which has suffered as a result of CDOs is ICBC, which holds USD 1.20bn of securities linked to US subprime mortgages. ICBC’s stock is down just over 1% since last Friday’s close. Garg added having a good ratings from ratings agencies did not matter as investors were more worried about the short-term impact on the stocks of these banks from the US subprime fallout. Both BOC and ICBC did not comment on the issue.
Among the insurers Taiwan-based Cathay Financial and Shin Kong Financial are the worst hit, though Taiwanese banks may have avoided the worst, analysts and bankers said.
“Banks in Taiwan do not have much exposure to CDOs nor using special purpose vehicles to invest in CDOs. It is mainly because they are relatively conservative about such investments,” said Renee Tsai, an associate director with Fitch Ratings in Taiwan. Tsai suggested local Taiwanese banks including Bank of Taiwan will not see any major issues related to CDOs investments.
According to the Financial Supervisory Commission in Taiwan, there are a total of 16 local banks that have CDO exposures with a total of USD 1.2bn. Fitch Ratings expected that this figure accounts for just over 2% of the banks’ total equity.
A sector banker with a local investment bank in Taiwan agreed, and suggested mergers and acquisitions will still be the market focus in Taiwan’s banking sector.
“CDOs should not be too much of a concern for local banks in Taiwan and is unlikely to slow down foreign investors’ appetite to acquire local banks this year,” said the banker.
Of the Taiwanese insurers, Cathay Financial’s exposure to CDOs is expected to be TWD 29bn (USD 875m), while Shin Kong’s exposure to CDOs is about TWD 20bn, Garg said. Both Garg and the Hong Kong-based banker expect their stocks to be under pressure in the coming weeks. Cathay and Shin Kong did not comment on the issue.
A measure of the problems faced by the regional banks can be gauged from the MSCI Asia-Pacific Financials Index, which lost just over 8% in the last one month, according to news reports.
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