Now that the term “structured investment vehicle” is on its way to becoming the finance world’s version of a household phrase, every day brings fresh concerns about the fall-out from US subprime mortgage investments on banks and their off-balance sheet vehicles.
Tuesday’s crop is no exception, with reports in the The Times, Reuters and Bloomberg that banks including Barclays and State Street may be facing losses from the so-called conduits that invested in CDOs.
The Times says State Street has been identified as having $22bn of exposure to asset-backed commercial paper conduits. According to US regulatory filings, the Boston-based bank has credit lines to at least six conduits, which account for 17 per cent of its total assets, says The Times. That proportion makes State Street the most highly exposed bank to conduits among its European and US peers; IKB, of Germany, which was forced to accept emergency funding for its conduit last month, had credit lines worth 15 per cent of its total assets. Deutsche Bank and WestLB each have exposure of 6 per cent, notes The Times.
Meanwhile, the risk of owning Barclays debt rose last week, according to Bloomberg which cites traders of credit-default swaps. The resignation last week of Edward Cahill, head of Barclays Capital’s CDO operations in Europe, has only added to fears that banks may face as-yet undisclosed liabilities from conduits and related investment vehicles, notes The Times, while Bloomberg adds that two funds arranged by Barclays had credit ratings slashed to junk from AAA by S&P on August 22 after investors refused to buy their debt.
The FT, reports Tuesday that Barclays faces scrutiny over its links to Sachsen LB, the failed German public sector bank, after it emerged that Barclays had set up an SIV-lite on the German bank’s behalf less than three months before it collapsed.
And in Asia, DBS Group, Singapore’s largest bank, on Monday evening said it has more at risk from CDOs than it earlier revealed after market turmoil led a special-purpose vehicle to seek additional funds, reports Bloomberg. The bank has S$2.4bn ($1.6bn) of CDOs up from S$1.4bn declared on August 7, including S$1.1bn worth held by a so-called conduit, Red Orchid Secured Assets, or Rosa, DBS said. The bank’s shares dropped 1.5 per cent on Tuesday morning in Singapore.
In a note on Tuesday, however, Barclays Capital played down negative credit implications and said it believed any ensuing losses at DBS would be easily absorbed. Indeed, said BarCap, “DBS’s total CDO exposure of S$2.4bn is equivalent to around 1% of total assets and two-thirds of annualised pre-provision operating profit,” and that its Stable fundamental credit view and Marketweight recommendation for benchmarked investors are unchanged.
Reuters, meanwhile, reports that China Construction Bank, one of China’s big four state lenders, said Monday it held $1.06bn worth of CDOs at the end of June but expects the securities to have “limited impact” on its operating results for the year.
Analysts said the US subprime exposure to Construction Bank was manageable, because it only accounted for about 2.5 per cent of its equity, Reuters added.
However, as Lex noted last week when Bank of China announced it held nearly $10bn of US subprime mortgage-backed securities, the subprime exposure “looks less toxic when measured against the bank’s capital”:
BoC’s $10bn exposure represents a little more than 1 per cent of total assets and about one-fifth of shareholders’ equity. It is also relatively top-drawer paper. More than 75 per cent of the securities are AAA-rated while almost all the remainder are AA.
Industrial and Commercial Bank of China, the world’s biggest bank measured by its Shanghai-listed market capitalisation, also said it held $1.23bn – 4 per cent of its foreign exchange investment portfolio – in US mortgage-backed securities but had so far incurred no related losses.
But – and it is a “but” that grows bigger by the day – with bankers scrabbling to price subprime securities, “it would be naive to assume Bank of China’s $145m provisions mark an end to the story – particularly since Industrial & Commercial Bank of China also revealed exposure of $1.2bn,” warned Lex.
More worryingly, it added, “the fact that Chinese lenders are dabbling in such exotic instruments barely a year after transforming into partially privatised entities shows risks are spreading. Investors are accustomed to wobbles on the credit side: Chinese lenders are poor at pricing risk and the buoyant economy discourages caution”.
Actually, we could think of others – and they’re not Chinese banks – to which Lex’s words might apply.