ôLosses on such investments will put a dent in annual earnings but do not pose a systemic risk as they are not a serious threat to the soundness of the banks we have surveyed,ö says David Marshall, managing director and head of FitchÆs financial institutions group in AsiaûPacific.
Marshall says that the key issue is the need for banks to provide liquidity rather than adding materially to their subprime exposures, and the ratings agency expects the banks to be able to meet these commitments given the modest size of conduits relative to the banksÆ own balance sheets.
However, given volatility, Fitch points out that there are risks to Asian banks beyond their subprime exposures. These may need to book accounting losses on marking to market other structured products, whose market values may be depressed by poor sentiment and decreased liquidity. Nevertheless, continuing to hold these securities should eventually reverse these losses. In addition, significant economic losses may only be incurred should we see a change in the default and loss rates on asset classes other than securities backed by US subprime mortgage exposures, continues the report.
In Singapore, the overall collateralised debt obligation (CDO) exposure of banks, which have been the most transparent in Asia, has totalled $1.5 billion, which could dent earnings but not weaken their capital.
Thai banks such as Siam Commercial Bank and Kasikornbank have reported no exposure to CDOs, while Bangkok Bank, Krung Thai Bank and Bank of Ayudhya reported an exposure of up to 6% of equity. This is unlikely to threaten solvency. However, BankThai has more substantial CDO investments, including Bt1.7 billion (21% of equity) against which it has taken a Bt0.3 billion write-down.
Although full details on their subprime exposures are not available, Taiwanese banksÆ CDO exposures total $1.3 billion, which equates to only just over 2% of their aggregate equity.
KoreaÆs banks, meanwhile, have very limited exposure to CDOs, apart from Woori which has total CDO and mortgage-backed securities investments equal to less than 5% of equity. Other Korean banksÆ exposure is much lower and, for most, the sub-prime exposure is negligible. The same applies for most of the Hong Kong banks surveyed by Fitch.
In China, Bank of China and ICBC disclosed yesterday a combined $12.5 billion sub-prime exposure. However, Fitch does not consider subprime related losses for most Chinese banks as material when taken in relation to capital (as opposed to dollar terms).
In the Philippines, the central bank has announced that banks hold in aggregate $180 million of CDOs, the equivalent of 2% of system equity. Rizal Commercial Banking Corp holds $60 million, or 16% of equity, although it seems all of these are backed by corporate debt and not by mortgages.
MalaysiaÆs banks have not reported any direct exposures and any indirect exposures are thought to be small, while IndonesiaÆs banks report no significant exposures, although a few have small investments in commercial paper issued by ABCP conduits via their New York offices. This amounts to 0.2% of assets.
IndiaÆs banks have not released any details regarding their subprime exposures. However, given that Indian banks have experienced strong demand for mortgage finance in their domestic market, exposure due to international activities will not be substantial relative to their capital.