Tuesday, August 28, 2007

DBS Falls 3% On Risky Debt Exposure

Source : The Business Times, August 28, 2007

SINGAPORE - Shares in Singapore's DBS Group Holdings fell almost 3 per cent on Tuesday after the bank said it was injecting cash into a special-purpose vehicle that invests in risky debt such as collateralised debt obligations (CDOs).

The move came after investors balked at providing the $1.4 billion (US$921 million) vehicle with more short-term funding by rolling over their investments, amid turmoil in global credit markets.

The DBS vehicle, 'Red Orchid Secured Assets', which includes $1.1 billion of CDOs with the rest in loans and bonds, leaves the bank with nearly double the exposure to CDOs that it had initially declared.

Analysts said that as the debt matures and investors do not roll it over, the exposure comes back on to DBS's books.

'Banks provide liquidity when they cannot find third parties to finance such structures. Then the parent bank has to come in to provide liquidity,' said Thilan Wickramasinghe, an analyst at CLSA.

Last week, CLSA said in a client note that DBS would have to provide liquidity to the vehicle because investors holding the asset-backed commercial paper would not renew their investment due to credit market turmoil.

A spokeswoman for DBS, South-east Asia's biggest bank by assets, said the bank had already injected some funds into the vehicle. She did not provide details.

DBS said it had not shown the commercial paper in its direct exposure to CDOs in an earlier disclosure because it believed it would continue to be funded by investors. It said total exposure to CDOs made up only 1 per cent of its overall assets.

DBS's share price fall added to losses on Friday, when DBS first confirmed to Reuters its extra exposure to the CDO market, and it took the stock down 12 per cent since the start of the year, versus a 12 per cent gain in the Straits Times Index .

JPMorgan said in a note to clients that DBS was among the stocks it is recommending investors to avoid.

'Singapore banks and Taiwan insurers appear to be the most at risk, and we see no merit in owning these stocks,' JPMorgan analyst Sunil Garg said.

Singapore's United Overseas Bank fell nearly 2 per cent and Oversea-Chinese Banking Corp dropped 0.6 per cent.

On Friday, Singapore's central bank told banks for the second time this month to take a close look at their books.

JPMorgan said that, with DBS's corporate bond portfolio of over $10 billion classified as 'held for trading', mark-to-market losses could impact third-quarter earnings significantly.

On Tuesday Goldman Sachs cut its ratings for DBS to 'neutral' from 'buy' and lowered its 12-month price target to $24 from $31, citing the bank's exposure to CDOs. The stock was quoted at $19.80 at 0827 GMT.

Goldman analyst Bok Chuan Tan said in a note to investors that while he believed DBS's fundamentals remained strong and the share price correction was overdone, he saw no near-term catalysts to mitigate the bank's CDO exposure overhang. -- REUTERS

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