INVESTORS1 HUNTING for opportunities in the global market chaos2 may want to look to Asia, where jitters3 over widening credit troubles in the U.S. and Europe have driven down the share prices of some financial institutions that actually have little exposure to the problem.
Taiwanese insurers and Singaporean banks may represent some of the best buying opportunities, analysts5 and investors say. Companies like Shin Kong Financial Holding and Cathay Financial Holding in Taiwan and DBS Group Holdings and Oversea-Chinese Banking6 in Singapore have reported some exposure to subprime mortgages and related credit instruments in the U.S. But their exposures are limited and don't seem to justify7 the recent drop in their shares of 10% or more, these analysts and investors say -- especially given the strength in their core operations.
'The markets are panicking a bit and perhaps driving down prices in certain financial institutions too much,' says Peter Tebbutt, Hong Kong-based senior director of financial institutions at Fitch Ratings. 'In the end, we'll find the losses will not be very significant. The prices may well rebound,' he says.
The current troubles are rooted in rising defaults on American subprime mortgages, those issued to borrowers with relatively8 weak credit histories. Subprime loans, issuance of which has surged in recent years, are often pooled into securities that are split up and sold to hedge funds, insurers, and other investors.
Worries over the falling values of some such investments have already spread to some financial companies in Australia and Europe. The concerns hammered U.S. stock prices last week, sending the Dow Jones Industrial Average down 0.23% on Friday. When the current selling will end, and how widespread the fallout will be, remains9 unclear -- making any opportunistic buying inherently risky10.
In recent weeks, analysts have been soliciting11 information from Asian financial institutions on their exposure to such investments. Analysts' assessment12 of the subprime impact so far has depended on how transparent13 Asia's financial companies have been in reporting the numbers.
Still, overall the picture that has emerged is one of limited exposure to the problem in Asia. Malaysia and Thailand have almost no exposure to U.S. subprime securities. By law, Indian banks and insurers aren't allowed to move money offshore14, so the problem there is also basically nonexistent. Big banks in China and Japan are also believed to have very limited exposure.
In Taiwan, Shin Kong Financial has invested about $1 billion, or 3% of its investment portfolio15, in collateralized debt obligations, or CDOs, which are securities backed by bonds, loans and other assets, sometimes including subprime loans, Tracy Yu, an analyst4 with Citigroup in Hong Kong, writes in a Aug. 6 report.
Shin Kong's larger rival, Cathay Financial, has put about $600 million into CDOs, 1% of its investment portfolio. By regulation, Taiwan's insurers can invest only in highly rated instruments that have minimal16 default risk, so analysts aren't expecting these companies to be shaken up.
Yet their shares have taken a beating. Shin Kong's share price, which had previously17 risen more than 20% this year to an intraday high of NT$43.80 on July 16, a 52-week high, has since fallen almost 20%. The shares ended at NT$35.25 (US$1.07) in Taipei Friday, down 14% from the July 16 closing price.
Bruce Warden18, an analyst at CLSA Asia Pacific Markets, a brokerage house, has a 'buy' call on Shin Kong, saying that its wealth management and new businesses have been generating strong earnings19. He has a target price of NT$36.80 on the stock.
Similarly, Cathay Financial shares have dropped 12% on the Taiwan Stock Exchange since July 16. The company's exposure to U.S. subprime mortgages accounts for only 0.1% of its investment portfolio, according to Vincent Chang, an analyst with Goldman Sachs (Asia) in a report dated Aug. 2.
Of Singapore's three main banks, DBS has the biggest exposure, with US$850 million invested in CDOs, 22% of which are in asset-backed securities, including a portion of U.S. subprime mortgages, according to Citigroup's Ms. Yu. Oversea-Chinese Banking has about US$600 million in exposures to mortgage-backed securities, CDOs and subprime mortgages. The third, United Overseas Bank, has no direct exposure to the subprime market, analysts say. All three banks have reported second-quarter earnings above expectations.
Yet DBS shares have fallen more than 11% since mid-July. Oversea-Chinese Banking's shares have lost 10%, and United Overseas Bank has shed more than 8%.
'Fundamentals are quite good for these banks,' says Jay Moghe, chief executive officer of Opes Prime Asset Management, an asset-management and hedge-fund-services company in Singapore. 'These current dips should be seen as good buying opportunities.' His firm's hedge funds own Singaporean banks' securities, and Mr. Moghe said he is considering additional investments.
Some analysts urge more skepticism over the likely subprime fallout in Asia. 'Most banks in the world are claiming that their exposure to subprime is not material,' says Sanjay Jain, an Asian banks analyst for Credit Suisse in Singapore. He says stock markets will remain volatile20 until investors can figure out where the 'ultimate subprime risk resides' and 'the problems have been worked through.'
South Korean banks were the first in the region to disclose their exposure. Woori Bank, a unit of Woori Finance Holdings, has the highest exposure, with US$120 million of its US$490 million investments in CDOs in subprime exposure, according to analysts. That is a small fraction of Woori Bank's US$200 billion in assets. Still, shares of Woori Finance are down 9% since mid-July. Korean financial companies have about US$240 million in exposure to the U.S. subprime market and US$800 million in exposure to U.S. mortgage-linked CDOs, the government announced Friday.
Roy Ramos, a Goldman Sachs analyst, says the subprime problem for Asia is worth 'worrying over' but not 'panicking over.' 'This is a U.S. credit problem, not an imploding21 core business for Asian financials,' he writes in a report dated Aug. 6.
In Japan, home to some of Asia's biggest financial institutions, the top nine banks have a combined exposure of a little over a trillion yen22, or about US$8.4 billion, to financial products backed by subprime mortgages, says Nana Otsuki, a credit analyst with UBS Securities in Tokyo. That is just a tiny fraction of the total assets at those institutions. Ms. Otsuki thinks potential losses, and their impact on earnings, will likely be limited because Japanese banks have focused investments on the higher-quality portion of the subprime market.
Mitsubishi UFJ Financial Group, Mizuho Financial Group and Sumitomo Mitsui Financial Group -- Japan's top three banks -- reported little impact from subprime problems on their earnings for the April-to-June quarter.
Hong Kong and Chinese banks and insurers have small exposure to CDOs and asset and mortgage-back securities, says Ms. Yu in her Aug. 6 report. The bulk of these investments have received the highest credit ratings, so losses should be limited, Ms. Yu says.
These higher-grade investments could all unravel23, of course, if the U.S. subprime problems persist and a broad repricing of loans kick off. When that happens, investors will start doubting if even the highest-grade securities are as safe as they thought and will send shares of insurers and banks plunging24.
Analysts say they don't see that happening for now. 'There has not been any bank that has come out at this point with an exposure so large that it has warranted a downgrade,' Fitch Ratings' Mr. Tebbutt says. The impact 'has been fairly benign25.'
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