‘Stormy 2008′ expected for financial services

LONDON – THE financial services industry should expect ‘turbulent conditions for 2008 and beyond’ and may report an additional US$300 billion (S$429.8 billion) in losses related to the United States sub-prime crisis, according to a study by consulting firm Oliver Wyman.

‘We expect a stormy 2008,’ Oliver Wyman said in its State Of The Financial Services Industry report. ‘While governments, central banks and regulators scramble to address the aftermath of the sub-prime fallout, several other crises are mounting.’

A slowdown in European real estate, especially in Britain and Spain, potential weakening of the US dollar and a possible collapse in commodity prices may hurt the global economy, according to the report.

A drop in Chinese and Indian stocks may be a fourth ‘potential disruption’ this year, Oliver Wyman said.

Senior executives and investors are gathering at the World Economic Forum in Davos, Switzerland, amid concerns the world’s biggest economy is sliding into a recession.

The mood contrasted with the buoyancy of last year’s meeting, where guests celebrated a bumper year of corporate profits and bonuses and the strongest global economy in three decades.

The US Federal Reserve this week lowered the target rate for overnight bank loans in the first emergency cut since 2001, as it tried to prevent a recession.

US President George W. Bush and House lawmakers announced an agreement on an economic stimulus package that would distribute rebate cheques to 117 million families.

Economists at Goldman Sachs Group and Merrill Lynch are predicting the US economy will fall into its first recession in seven years this year.

Chief executive officers (CEOs) of financial services companies surveyed by Oliver Wyman said they expected share prices of financial services companies to increase between 5 per cent and 14 per cent this year.

The same prediction was made last year, according to Mr Alex Paidas, a spokesman for Oliver Wyman.

Instead, the industry contracted by 7 per cent. This year, 48 per cent of the CEOs surveyed cited deteriorating market conditions as a key threat.

Sixty-nine per cent of the CEOs polled in November and last month said they expected their companies to outperform the industry this year.

‘North American financial services firms will have a tough year,’ Oliver Wyman said. ‘Market uncertainty, combined with further write-downs and expected home price and loan volume declines, implies more squeezes on earnings. Banks most likely will have to increase loan-loss reserves.’

Growth in Western Europe is likely to suffer, while Latin America has a positive outlook and ‘growth opportunities exist’ in Singapore, Taiwan, Indonesia and Korea, according to the report.

Private equity is an industry that is likely to grow, the consulting firm said.

 

Source: BLOOMBERG NEWS (The Straits Times 26 Jan 08)

SUB-PRIME HITS: Bank of China may post 2007 loss on write-down

SCMP report heightens concerns about China’s exposure to crisis

(BEIJING) Bank of China might post a 2007 loss because of a big write-down on billions of dollars of US subprime related investments, a newspaper reported yesterday, sending shares in the lender tumbling.

Quoting unidentified sources, the South China Morning Post said that Chinese banking regulators had warned the country’s leadership that Bank of China and two other state banks would make provisions for all their assets hit by US mortgage defaults.

The report heightened growing concerns about China’s exposure to the sub-prime crisis, which has hammered earnings of major European and Wall Street banks, prompting steep share falls and capital injections to shore up balance sheets.

Analysts, however, expressed doubts that Bank of China would make full provisions for all its sub-prime related assets in one go. The bank said that its sub-prime related assets were worth US$7.95 billion at the end of September.

Samuel Chen, a banking analyst at JP Morgan, said that write-downs would hurt fourth-quarter earnings but he still expected the bank, which earned more than US$6 billion in the first nine months, to post a full-year profit.

‘Given the US sub-prime crisis is getting worse, I expect Bank of China to raise its write-off to between US$800 million and US$1 billion in the fourth quarter,’ Mr Chen said. ‘If the bank writes off more than US$1 billion, there is a possibility that it will generate a fourth- quarter loss.’

The other two banks mentioned in yesterday’s report, Industrial Commercial Bank of China and China Construction Bank, have said that they held US$1.23 billion and US$1.06 billion respectively in sub-prime related investments.

Hong Kong-listed shares in Bank of China, the country’s flagship foreign exchange lender, fell 4.7 per cent to HK $3.43 on fears that a one-off write-off would hit fourth-quarter results, due to be announced in April.

Hong Kong stocks dived yesterday in their worst one-day fall since September 2001, as a US economic stimulus package failed to calm investor nerves about a possible US recession. The benchmark Hang Seng Index ended down 5.5 per cent at 23,818.86, in its worst single-day percentage loss since September 2001.

The China Enterprises index of H-shares, or Hong Kong-listed shares in mainland companies, dived 7.1 per cent.

A bank spokesman in Beijing declined to comment.

Bank of China made a net profit of 45.5 billion yuan (S$9 billion) for the first three quarters of 2007, after booking its US$322 million impairment allowance for US sub-prime mortgage- backed bonds in its third-quarter account.

The bank surprised markets in August by announcing that it held US$9.65 billion of sub-prime related securities and in October, it booked US$643 million in provisions and reserves for sub-prime related investments.

It also set aside US$321 million of reserves against its balance sheet to reflect depreciation in the fair value of the sub-prime related securities.

BNP Paribas has lowered its 2007 and 2008 earnings estimates for Bank of China by 9 per cent and 12 per cent respectively to 46.9 billion yuan and 51.9 billion yuan, because of expected write-offs and falling fee income as Chinese stock markets cool.

BNP expects the bank to write off 17.5 billion yuan, or around US$2.4 billion, in 2007 and the same again for 2008 because of the sub-prime crisis.

Chinese officials are increasingly voicing concern about the fallout of the sub-prime crisis, backing away from earlier confident judgments that the country was largely insulated.

The semi-official China Business News yesterday reported that a special task force comprising officials from several government agencies recently made an assessment of the potential impact of the sub-prime loan crisis on Chinese banks. ‘The conclusion they have drawn is not very positive,’ the paper said, without citing specific sources.

 

Source: Reuters (Business Times 22 Jan 08)