US Subprime Losses Grow, Top Japan Bank Hit Too

Source : The Straits Times, Jan 17, 2008

NEW YORK - CREDIT losses tied to troubled subprime mortgages continued to mount at major United States financial institutions on Wednesday, while Japan's top bank also took a sizable hit.

JPMorgan Chase, the No. 3 US bank, reported fourth-quarter net fell 34 per cent as it recorded US$1.3 billion (S$1.9 billion) in markdowns on subprime positions and saw sharply higher credit costs.

JPMorgan's write-down sent its net income down to US$2.97 billion, or 86 cents a share, in the period from October to December, from US$4.53 billion, or US$1.26 a share, in the same period a year earlier.

'We remain extremely cautious as we enter 2008,' CEO Jamie Dimon, said in a statement as his bank quadrupled to US$1.1 billion the provision it needs to cover ongoing problems on home equity and high risk mortgage loans.

That said, JPMorgan provided comparative relief from the gloom cast by Tuesday's colossal US$18.1 billion write-down by Citigroup.

Also on Wednesday, bond insurer Ambac Financial Group said it expects a US$5.4 billion pretax write-down in the fourth quarter and will cut its quarterly dividend by two-thirds.

Ambac also announced plans to raise US$1 billion in equity and equity-linked securities and named an interim chief executive as it scrambled to maintain its prized triple-A credit ratings.

Its shares plunged nearly 40 per cent on the day.

If that weren't enough, Wells Fargo said its fourth-quarter profit fell 38 per cent, the first decline in more than six years, hurt by rising losses from home equity loans. But the decline at the San Francisco-based bank was smaller than expected.

'What we are starting to see is the flushing out of all these credit problems and an admission that there are losses,' said Mr Tom Atteberry, a partner at First Pacific Advisors, with assets under management of US$11 billion. 'This is a part of the healing process.' Damage was not contained to the United States.

Japan's largest bank, Mitsubishi UFJ Financial Group, may have lost as much as 50 billion yen (S$666 million) on subprime investments last year, up from the 4 billion yen it reported for the six months to September, according to executives with direct knowledge of the matter.

Shares in Japan's big banks, which have ridden the credit crisis relatively unscathed so far, fell sharply in response.

'Sentiment is bad because no one knows if there will be further losses,' said Mr Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.

Merrill looms
Investors are already looking to results on Thursday from troubled Merrill Lynch, following the massive write-off by Citigroup, America's largest bank.

Wall Street analysts' scenarios range from US$10 billion to US$25 billion in write-downs for investment bank Merrill, which wrote off US$8.4 billion in the third quarter.

Banks, wrestling with huge losses stemming from US mortgages lent to people ill-equipped to repay them, have been actively seeking cash from abroad from sovereign wealth funds.

Merrill said on Tuesday it would raise US$6.6 billion from selling preferred shares to an investor group that included the Kuwait Investment Authority.

That is on top of the US$6.2 billion capital infusion announced last month in a deal with Singapore's Temasek Holdings and US-based Davis Selected Advisers.

Citigroup announced an overall fourth-quarter loss of US$9.83 billion - its first quarterly loss since its creation in 1998 - and said it was raising US$14.5 billion from offerings of convertible preferred securities.

Saudi Arabian Prince Alwaleed and the government of Singapore were among the investors. In November, Citigroup raised US$7.5 billion by selling a 4.9 per cent stake to Abu Dhabi.

The Government of Singapore Investment Corp, Singapore's biggest sovereign wealth fund, said on Wednesday its large investment in Citigroup and US$9.75 billion injection into credit-hit Swiss Bank UBS AG were unique at a time of financial turmoil and did not represent a strategy shift.

Many experts say ongoing losses at major banks means the crisis is far from over as crucial lending between commercial banks remains patchy at best.

With fears of a US recession growing, interest rate futures are pricing in an almost 1-in-2 chance of a hefty 75 basis points cut in US interest rates, when the Federal Reserve meets at the end of the month - or possibly even earlier. -- REUTERS