OCBC's $221m Writedown To Cut CDO Losses

Source : The Business Times, November 7, 2007

Bank hopes aggressive move will lift shadow from future earnings as market for ABS CDOs dries up

The market for some debt instruments linked to US sub-prime mortgages that were popular with banks worldwide 'has come to a virtual standstill', said OCBC Bank yesterday.

This led it to slash the value of its portfolio of ABS CDOs, or collateralised debt obligations comprising pools of asset-backed securities (ABS) from $270 million to just $48 million - less than a fifth of their original value.

Its $221 million writedown of its CDO holdings is the most aggressive so far among the three Singapore-listed banks.

'We can't predict the future, but what we've done this quarter is prepare for the worst and there logically is not going to be any future earnings impact from this portfolio,' said chief executive David Conner at a media briefing yesterday after the bank released its third-quarter results.

He said the bank decided in September and early October to value these ABS CDOs using a model from 'one of the global banks' after the market for the ABS CDOs became so illiquid that market quotations were no longer a reliable measure of their value. 'The ABS CDO market is effectively closed.'

Based on the model, OCBC wrote down the value of its ABS CDO portfolio by 82 per cent. Had the bank continued to rely on market quotes, the value of the ABS CDOs would have been $65 million, instead of the $48 million suggested by the model, said the bank. Inputs to the model are based on observable US housing market data, including delinquency rates and foreclosures, it said, although it did not name the bank that provided the model.

OCBC has another $372 million invested in corporate CDOs - those backed by corporate bonds - that are not exposed to the US sub-prime market. For these corporate CDOs, 'the market is still open and operating, it has not declined dramatically, so we're still marking those to market', said Mr Conner. The fair value of the corporate CDO portfolio at end-September was $357 million, said the bank.

He stressed that even with recent downgrades in the credit ratings of some of the CDO tranches, 'the portfolio that we have is still rated investment grade' and there had been no defaults on payments to the bank.

In its third-quarter earnings release on Oct 26, DBS Group said it made $70 million in allowances for its $275 million in CDOs that were exposed to US sub-prime assets.

On Oct 30, United Overseas Bank (UOB) said it had made an additional provision of $20 million for its CDO investments, bringing its total provision to $55 million so far. UOB has total CDO investments of $388 million, of which $90 million is in ABS CDOs.

Yesterday's writedown by OCBC came at a trying time for banks elsewhere. In the US and Europe, large financial groups such as Citigroup, Merrill Lynch and Credit Suisse recently said they had suffered much bigger losses from the credit market turmoil than earlier estimates had suggested. The chief executives of both Citigroup and Merrill Lynch have since been forced out.