Bank Stocks Hit By Sub-Prime Worries Again

Source : The Business Times, August 29, 2007

Attention also shifts to impact on their fee income

(SINGAPORE) Banks here were hit yesterday by renewed concerns over their exposure to collateralised debt obligations or CDOs, after Goldman Sachs downgraded its stock ratings on DBS and OCBC, sending their share prices lower.

But analysts BT spoke to said the main worry for now was the impact of the current financial market turmoil on the fee income of all three banking groups, rather than potential losses from CDOs. These instruments are securities backed by batches of loans, which may include sub-prime or high-risk mortgages.

Separately, Merrill Lynch analyst Andrew Maule in Singapore yesterday issued a 'buy' call on DBS, saying the recent fall in its share price 'exaggerates the likely damage to its long-term earnings power or capital ratios'.

Last week, DBS said its direct exposure to CDOs could rise by $1.1 billion if it were required to top up funding for a special-purpose vehicle it manages, causing its share price to fall.

In a statement on Monday, DBS said the vehicle has had to draw on funds from the bank following the market volatility in recent weeks. But it said there had been no change to its exposure to US sub-prime mortgages, as none of the CDOs in the vehicle has direct exposure to them.

David Lum at the Daiwa Institute of Research said: 'Given the disclosed exposures so far, it should be nothing to worry about.' He has an 'outperform' rating on all three banks, as of Monday.

Both DBS and OCBC were downgraded by Goldman Sachs from 'buy' to 'neutral' in separate reports yesterday, citing ongoing concerns over their CDO exposure.

United Overseas Bank (UOB) was already rated 'neutral' by the investment bank's research team in its last update on Aug 16.

For OCBC, there are 'no visible near-term catalysts to mitigate its CDO exposure overhang, which would make it difficult for the stock to outperform the broader market', the report said.

Meanwhile, 'DBS has one of the highest exposures among Asia ex-Japan financials, and it is the only Singapore bank yet to make any form of related provisions'.

Shares in all three banks fell yesterday as part of a slide in the broader market. DBS ended 2.9 per cent lower at $19.80, while UOB fell 2.4 per cent to $20.50. OCBC's shares were down 1.2 per cent at $8.50.

Earlier this week, JP Morgan analyst Sunil Garg, who is based in Hong Kong, downgraded the weighting of Singapore banks in its model portfolio of financial sector stocks in Asia from 7.3 per cent to zero.

The investment bank said financial institutions that have been 'too liquid, searched for yield and operated in sophisticated environments are most at risk' from the current fallout in financial markets stemming from the sub-prime mortgage market in the US.

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

Pauline Lee at Kim Eng Securities said her main concern now was slower fee income growth in the second half of the year and beyond, and how much the current market turmoil would affect demand for the banks' services and products.

Non-interest income - which includes gains from the banks' proprietary trading and risk management activities, as well as fees from investment banking, wealth management and securities brokerage - made up some 40 per cent of their total income in the second quarter.

While the market volatility 'should benefit the stockbroking subsidiaries, it could have a negative impact on investment banking', said Tay Chin Seng at Macquarie Research in a report earlier this week. He also said that the banks' CDO exposures were 'unlikely to have a significant impact' on their earnings.

A separate strategy note by Citigroup earlier in the week said banks here were trading at 'attractive valuations'. Citigroup said: 'We believe that local banks' exposure to sub-prime loans is relatively small compared to their asset bases and poses little threat to their financial position.'