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Asian Banking Keeping Its Head Above Water (September 14, 2007)

Location: New York
Author: Lenny Broytman
Date: Friday, September 14, 2007


The US credit crunch has been reeking havoc across the globe but according to an Asian Banker Research study, the impact has been somewhat limited in the Far East.

With a market consisting mostly of asset- and mortgage-backed securities, collateralized debt obligations (CDOs) and a variety of other credit derivatives, writes that the study found that "30 banks in the region who have disclosed their investments in US debt securities shows that the impact of US sub-prime woes has limited direct impact on their profitability and capital bases."

According to the study, this profitability of many Asian banks has the potential to drop up to 175.8 percent in a worst-case scenario. If this were to ever take place, the bank's total investment in subprime mortgage-related securities would be placed on the trading book and would assume a full marked to market loss. If these full investments were to be held to maturity, a doomsday scenario could potentially result in a 42.8 percent drop for shareholders' equity without hurting earnings directly. In any event, many experts agree that banks would ultimately be forced to raise provisions in an effort to replenish reserves to protect investors from future volatility.

Regardless of all of this, few believe that any of the 30 banks from the survey would ever succumb to that type of extreme situation; most of the banks' exposure to the US subprime meltdown has been in the form of investment grade corporate papers which, for the most part, have had minimum, insignificant exposure to mortgage-backed securities or CDOs with mortgage portions. Even for the banks that did experience exposure to CDOs containing subprime asset classes, these investments were made via tranches that were rated single-A or higher.

As far as Chinese banks are concerned, the institution with the most at stake is the Bank of China, which has a whooping total of $9.7 billion in mortgage-related securities on the table. If things were to suddenly turn sour, the bank stands to lose up to 1.75 times its 2006 net profit total. If the losses on the investments were to somehow reach 100 percent, nearly 20 percent of shareholder equity would be lost. Out of that $9.7 billion total, only $0.7 billion are invested in CDOs with subprime portions; it is these types of investments which are expected to endure the brunt of the mess when and/or if one were to materialize.

The Taiwan market, on the other hand, has seen some hefty exposure to the subprime disaster and many feel that this is a direct result of the fact that a large number of Taiwanese holding companies also manage large insurance firms to boot. According to published reports, companies such as Cathay Life, Taiwan Life and Shin Kong Life have suffered some rather substantial losses as a result of this.

So what exactly does the future hold for the Asian banking sector? Many banks have spent years inadequately pricing risk during the years of extremely high liquidity and many are doing their very best to remedy this for the future. As of this moment, the woes of the US credit demise have done little for Asian banking and many people feel that while the credit situation in the States is tight, the world economy has grown strong enough for Chinese banks to keep their heads above water for years to come.

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