DBS Exposure To US Sub-Prime About $2.4b

Source : The Straits Times, Sat, Aug 25, 2007

DBS Group Holdings confirmed yesterday its exposure to the United States sub-prime mortgage crisis is about $2.4 billion - almost double the amount it had acknowledged previously.

The disclosure sent its stock falling by as much as 60 cents yesterday, hitting a low of $19.90 before clawing back to close 30 cents lower at $20.30.

The increased extent of DBS' exposure was revealed in a report by broker CLSA this week.

DBS had stated about two weeks ago that its exposure to collateralised debt obligations (CDOs) - financial instruments backed by bonds and sub-prime mortgages - was US$850 million (S$1.3 billion). It also stated that it had distributed US$1.7 billion of structured products involving CDOs to institutional and private banking investors.

But CLSA said DBS has direct exposure to $1.1 billion worth of CDOs via a special investment vehicle called Red Orchid. This vehicle holds commercial paper - a type of corporate debt usually due in nine months or less - which is invested in CDOs.

This paper is due for renewal soon. DBS must provide back-up funding for it if third-party investors do not want to take up a new tranche. This is possible as the sub-prime crisis has made investors very risk-averse. In this case, DBS' direct CDO exposure becomes $2.4 billion, noted CLSA.

'We are comfortable with our exposure to this' commercial paper, a DBS spokesman said. She confirmed the figures cited in CLSA's report, but clarified that the $1.1 billion of CDOs in Red Orchid had been included in the US$1.7 billion figure that DBS cited earlier in reference to structured products involving CDOs.

United Overseas Bank (UOB) has an investment vehicle similar to Red Orchid - it is called Archer - but it is tied up in bonds, not CDOs.

The bank's CDO exposure amounts to $392 million, of which $91 million is asset-backed securities CDOs. Its shares dipped 10 cents to $20.60.

OCBC Bank has US$430 million invested in CDOs, of which US$181 million is invested in asset-backed securities. It does not have any investment instruments like Red Orchid. Its shares rose five cents to $8.65 yesterday.

Fitch Ratings said on Wednesday that Singapore's three local banks, which have been 'the most transparent in Asia' in disclosing their CDO holdings, have limited exposure to sub-prime mortgage CDOs. 'The overall CDO exposure of the Singapore banks, of around US$1.5 billion, could potentially give rise to losses that would dent annual earnings but would not materially weaken their capital.'

Nonetheless, the Monetary Authority of Singapore said yesterday it 'continues to monitor the development of the US sub-prime market and the financial institutions' exposure to this sector'.

It told The Straits Times that it urges the banks to 'factor the current environment into their regular stress testing and take appropriate action where necessary'.