2nd UPDATE: OCBC Investment Arm Exposed To Subprime Risk

August 08, 2007, 1:20 a.m. EDT 4 Min Read

(Adds analysts' comments on exposure to U.S. subprime mortgages, share pricereaction.)

By John Jannarone and Patricia Kowsmann

Of DOW JONES NEWSWIRES

SINGAPORE (Dow Jones)-- Oversea-Chinese Banking Corp. Ltd. (O39.SG) has littledirect exposure to fallout from the U.S. subprime mortgage market, but itsinvestment management arm bears a heavier risk.

OCBC, Singapore's third-largest bank by assets, holds S$650 million ( US$430million) in collateralized debt obligations, and only a fraction of the assetsare linked to subprime mortgages, the bank said in a statement Monday.

But analysts say OCBC's reputation as a wealth manager could suffer if lossesarise at 91%-owned Lion Capital Management, which holds about S$1.4 billion inassets linked to U.S. subprime mortgages.

Lion Capital's exposure to such assets reflects a pressure faced by fundmanagers globally that seek competitive yields but are constrained by investorswho shun risk.

The U.S. subprime mortgage crisis has boosted the cost of credit, exposingfunds invested in structured credit backed by subprime mortgages to potentiallosses.Although Asia's exposure to U.S. asset quality problems appears so far tobe limited, Citigroup said in a recent report that Singapore's banks are amongthose with the highest CDO exposure in Asia.

And the additional exposure in wealth managers' portfolios highlights apotentially higher risk area, although no losses have been reported so far.

"It's no shock to see this kind of exposure," said an analyst who asked not tobe named. "It's the kind of story you'll find popping up relatively frequently -driven by institutions that are risk-averse but yield hungry."

Lion Capital's S$1.4 billion in exposure to securities linked to the subprimemortgage market reflects around 4% of total assets under management.

The asset "consists of one high grade (asset backed security) with underlyingsecurities rated AA and A, which have exposures to U.S. subprime mortgages,"OCBC said in a statement.

A representative from Lion Capital declined to comment.

Singapore's two other big banks have reported comparably low direct exposureto subprime mortgages, but the figures may belie a common danger faced by theirasset management arms.

DBS Group Holdings Ltd. (D05.SG) has said its exposure to CDOs isn't material,with a total portfolio of around US$850 million, or 6.6% of equity.

A United Overseas Bank Ltd. (U11.SG) spokeswoman told Dow Jones Newswires thatthe bank's exposure to CDOs is "insignificant, with less than 0.3% of totalassets."

According to a recent report by rating agency Fitch, however, the bank's fundmanagement arm, UOB Asset Management, had US$7.7 billion of CDO products undermanagement as of the end of May.

The spokeswoman declined to comment on UOB Asset Management's exposure.

"The concern is related to the demand for the financial products of the threebanks going forward," said Kim Eng Securities analyst Pauline Lee.

"This will dampen the sentiment for a lot of financial products, and peoplewill be more skeptical to take them."

Concerns about subprime exposure in the U.S. Friday prompted a rout on WallStreet, and OCBC's mere mention of CDOs struck a nerve in an anxious market.

At 0820 GMT shares of OCBC were down 4.6% at S$8.30, while DBS shares weredown 4.6% at S$20.90. UOB shares were down 4.8% at S$20.00. The Straits TimesIndex was off 3.6% at 3313.71, in line with losses across Asian stock marketsMonday.

"Market sentiment, rather than fundamentals, is hurting the banks," PhillipSecurities Research analyst Brandon Ng said.

Hedge funds, particularly in Australia which is home to the largest hedge fundindustry in the region, have recently drawn attention for taking bets on thesubprime mortgage market, but fund managers like Lion Capital may reflectanother significant class of investors with hidden exposure.

"A lot of problems could be lurking at the big institutions," said the analystwho asked not to be named.

"Hedge funds are monitoring positions and things become visible quite quickly,but disclosure at insurers or asset managers may come slowly."

Direct Exposure Appears Less Threatening

OCBC, including its subsidiaries, now holds investments dating back to 2003that include US$181 million in asset-backed securities and the balance incorporate CDOs.

The bank's 87%-owned subsidiary Great Eastern Holdings Ltd. (G07.SG) has S$177million in CDOs including an estimated S$28 million in assets that are exposedto U.S. subprime mortgages.

Of the S$177 million in CDOs, S$166 million is invested from its lifeinsurance funds, which had assets of S$38.3 billion as of June 30.

OCBC's overall portfolio consists of 21% AAA grade assets, 22% AA gradeassets, 46% A grade assets, and 11% BBB grade assets.

"Under the current uncertain market conditions, the bank continues to monitorthe portfolio closely but has no intention to liquidate any of its CDOs," thebank said in a statement.

The bank said it would take an impairment charge if its portfolio valuedeclines, but it doesn't expect such an impairment to have a "material impact onits earnings or capital."

-By John Jannarone, Dow Jones Newswires; 65 6415 4152; john.jannarone@dowjones.com