Banks Don't Rule Out Further CDO Losses

Source : The Business Times, November 8, 2007

Analysts applaud OCBC's move, say future write-backs a possibility

Local banks are sticking to their positions for now, but concede that more charges could stem from losses arising from collateralised debt obligations (CDOs). This comes on the heels of OCBC's move to write down $221 million of its CDO holdings on Tuesday.

DBS Bank told BT yesterday that currently, there will be no changes to its positions. But a spokesperson added: 'As with any financial institution, it is certainly possible that further market changes may result in charges or write-backs to our positions.' She said that the bank had been conservative in how it derives market valuations and ascertains provisions for its CDOs.

United Overseas Bank also said that the necessary provisions for its CDO portfolio had already been taken in its third quarter results. 'In any case, we constantly review our investment portfolio on our own and will make any necessary adjustment when required,' a bank spokesperson told BT.

On Tuesday, OCBC announced that it had to write down $221 million of its CDO holdings, slashing the value of its portfolio of CDOs, which comprise pools of asset-backed securities (ABS), from $270 million to just $48 million.

OCBC's aggressive write-downs are the largest of the three local banks. Late last month, DBS Group made $70 million in allowances for its $275 million in CDOs that were exposed to US sub-prime assets, while UOB's total provision stands at $55 million so far.

Investors, probably spooked by the prospect of more writedowns, sent all bank stocks lower yesterday. Shares of DBS were the worst-hit of all three banks, shedding 50 cents or 2.3 per cent to $21, while UOB ended 10 cents or 0.5 per cent lower at $20.50. OCBC closed 10 cents or 1.1 per cent down to $8.80.

Analysts, on the other hand, see an upside to OCBC's move. 'We view these CDO provisioning rates to be extremely conservative ... as such, we believe that there is a significant possibility of write-backs or recoveries from this source in future years,' Deutsche Bank said in a research report.

The much larger allowance also means that future earnings might not be hit by further write-downs. 'This reflected management's conservative stance and should limit future downside risks,' said a BNP research report. A Merril Lynch report also noted that 'even if the US mortgage market were to deteriorate significantly further, OCBC would not likely face any further losses'.

Despite worries about the local banks' CDO exposure, ratings services Standard & Poor's Ratings maintained their ratings on Singapore banks, stating that they have negligible exposure to the sub-prime woes in the US.