LOCAL banks are desperately hoping there will be no contagion from the US sub-prime mortgage crisis given their small exposure to the high-risk loans.
Worrying sign: Rising defaults on US home mortgages have decreased investor appetite for risk, raising concern that more banks will soon reveal their exposure to the sub-prime mortgage market Last Friday, banking stocks fell even though report after report said the three local banks' exposure to collateralised debt obligations (CDOs, which are securities in which many sub-prime mortgages are packaged) was small.
US credit concerns prompted a sell-off last week that wiped US$2.1 trillion off global stock markets. Prices for CDOs have tumbled as rising defaults on US home mortgages decreased investor appetite for risk.
'Investors are still wary and there's concern that more financial institutions will come out to reveal their exposure to the US sub-prime mortgage market,' said Daphne Roth, vice-president of equity research at ABN Amro Private Banking in Singapore, in a Bloomberg report.
The Straits Times Index has fallen 6.3 per cent since closing at a record on July 24. DBS fell 50 cents, or 2.2 per cent, to $21.90. The bank said that it has US$187 million invested in CDOs based on asset-backed securities that have 'various exposures' to the US sub-prime mortgage market.
These asset-backed products amount to 22 per cent of the US$850 million the bank invested in collateralised loan and debt obligations, DBS said.
United Overseas Bank dropped 70 cents, or 3.2 per cent, to $21. UOB said that its exposure to CDOs is less than 0.3 per cent of total assets. OCBC was down 15 cents, or 1.7 per cent, at $8.70. The bank declined to comment on the bank's exposure ahead of the earnings announcement this Wednesday.
'Intense investor attention has been focused on Singapore banks' collateralised debt obligation exposure in the belief that they may have bought such securities for yield pick-up, given the low domestic yields,' wrote Sanjay Jain and Anand Swaminathan, analysts at Credit Suisse Group in Singapore, in a note last Friday. 'There will be mark-to-market losses near term.'
But Morgan Stanley's Matthew Wilson said that the Singapore banks' exposure to CDOs through their asset management arms could be more significant.
While earnings risk to the banks appears measured, at this stage, and the banks' direct holdings appear small in comparison to their ample balance sheets, the impact on investors who acquired the banks' wealth management products may not be so measured, he said.
Moreover, the situation is getting worse by the day in the US. There could be much more bad news to come over the coming months, said Mr Wilson.
UOB has a portfolio of CDOs in its asset manager, UOB Asset Management, of around $12 billion, which is about 50 per cent of the entire assets under management (AUM). It is unclear what the precise make-up is.
At end-2006, OCBC-owned Lion Capital had around $7.7 billion of CDOs/structured credits and $14.5 billion of fixed income securities, out of total AUM of $32.2 billion.
Mr Wilson said that there could be reputational risk issues for the banks, if investors incur losses.
Last week, Australia's Macquarie Bank, which manages the Fortress Funds, said that its funds have no direct exposure to the US sub-prime mortgages or CDOs. Instead, they have suffered a ripple effect from the worldwide credit issue as the demand for riskier debt has dried up, causing prices to fall.
Macquarie Bank's earnings would not be affected by losses to the Fortress Funds since it earns fees from management but does not own any of the funds. Still, nervous shareholders sold the bank's stock down 10 per cent.
Perhaps bank shareholders here are made of sterner stuff and are more confident that local banks can ride out the CDO storm.
Indeed, a bank insider said that one local bank has even been looking into picking up cheap CDOs, hoping to get them at firesale prices.
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