It is small and not likely to affect earnings, banks say
With fears swirling around the US sub-prime market, OCBC Bank and United Overseas Bank yesterday stepped in to provide more details of their exposure to collateralised debt obligations (CDOs).
Both banks said that their exposure was relatively small and was not expected to have a material impact on their earnings or capital. The asset management arms of both banks had dabbled more aggressively in CDOs, but this was done so on behalf of global investors, who alone bore the risks linked to these investments.
Despite assertions that the local banks were on sound footing, they did not emerge unscathed in yesterday's market rout. Shares of DBS Group Holdings fell $1 or 4.6 per cent to $20.90, UOB fell 6.2 per cent or $1.30 to $19.70, and OCBC was down 5.2 per cent or 45 cents to $8.25.
OCBC said the bank has US$430 million or $650 million invested in collateralised debt obligations (CDOs) representing 4.2 per cent of shareholders' equity and just 0.4 per cent of its total assets of $157 billion.
'Overall, OCBC group does not expect its CDO exposure to have a material impact on its earnings or capital,' the bank said.
Providing details for the first time of the group's exposure to CDOs since turmoil in the global credit market began some two weeks ago, OCBC also said that it is the policyholders of the four CDO-related funds sold by its insurance unit Great Eastern Holdings (GEH) and investors of CDO-related funds managed by its Lion Capital fund management arm who reap the returns and bear the investment risks.
CDO values have been tumbling as fear of a global credit crunch spreads.
Of OCBC's US$430 million exposure to CDOs, US$181 million is invested in asset-backed securities, including a portion of US sub-prime mortgages and the balance in corporate CDOs.
To-date there have been no ratings downgrades on any portion of the portfolio, it said.
Under accounting treatment, mark-to-market changes in the bank's CDO portfolio are reflected in 'fair value reserves' under the group's shareholders' equity.
Should there be any impairment to the portfolio, specific allowance will be made which will be recognised in the income statement. The bank does not expect this to impact on its earnings.
Meanwhile, GEH has invested $177 million in CDOs, of which $28 million are exposed to asset-backed securities which include US sub-prime mortgages, OCBC said.
GEH has four funds of $100 million each which are invested in CDO-related products and it is the policyholders who bear investment returns and risks, it said.
Lion Capital manages CDO funds amounting to $5.7 billion on behalf of institutional investors who alone bear the risks for these investments, it said.
'Lion Capital does not assume any liability in the event of occurrence of loss or default or write-down in market valuation,' said OCBC.
While there has been some mark to market volatility, none of the bank's deals has experienced any loss, it said.
'Under the current uncertain market conditions, the bank continues to monitor the portfolio closely but has no intention to liquidate any of its CDOs,' OCBC said.
UOB said its total exposure to CDOs was insignificant, with less than $400 million or 2.3 per cent of shareholders' equity or 0.24 per cent of its total assets of $166.7 billion.
Most of the CDO investments are backed by investment grade corporate credits, said UOB.
Out of this, $91 million are asset-backed securities CDOs. UOB's indirect exposure to US sub-prime from the underlying securities is small; the bank has no direct exposure to the US sub-prime market, it said.
UOB Asset Management (UOBAM) has no exposure in terms of investments in CDOs, UOB said.
UOBAM manages some $12 billion of CDOs for global investors who bear the investment risks.
UOB will provide more details today at its second quarter results briefing.
Matthew Wilson, Morgan Stanley analyst, said the prospect of credit rating downgrades is behind nervous shareholders' selldown of bank stocks.
'The risk remains that rating agencies may de-rate these securities given the state of US credit markets,' said Mr Wilson.
He said that some people think that 'held-to-maturity' accounting will mitigate the losses.
'We do not think so; it is perception only,' he added.
Tracy Yu, Citigroup banking analyst said the sell-off of Asian financial stocks was 'overdone, unless there is a broad re-pricing of CDO risk and credit spreads that results in significant loss for even the highest grade investments.'
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