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Exposure to US sub-prime loans negligible, says DBS

DBS Group has reiterated that its exposure to the United States sub-prime market is ‘negligible’.

Only US$188 million (S$286.7 million) of the bank’s collateralised debt obligations (CDOs) ‘directly reference some exposure’ to US sub-prime mortgages, said DBS group chief financial officer Jeanette Wong.

This makes up just 12 per cent of the bank’s total $2.4 billion holdings of CDOs.

‘There has been no change’ from what was disclosed earlier in terms of DBS’ exposure to the sub-prime market, she noted in an e-mail response to The Straits Times.

CDOs are debt instruments backed by assets. These assets can be made up of bonds, loans and their derivatives, and can include corporate loans and home loans, such as sub-prime mortgages.

DBS’ total exposure to CDOs makes up only 1 per cent of the bank’s overall assets, added Ms Wong.

She noted that more than 70 per cent of the CDOs are concentrated in high-quality financial instruments with AAA or AA+ ratings.

Ms Wong’s remarks came one day after DBS’ shares fell 30 cents last Friday to close at $20.30. This followed a Reuters report that highlighted DBS’ exposure to CDOs via its special-purpose vehicle or conduit called Red Orchid.

In total, Red Orchid has issued $1.4 billion worth of commercial paper, of which $1.1 billion is backed by CDOs.

Usually, third-party investors who buy commercial paper roll it over when it matures. If they no longer want to do so, DBS must provide back-up funding for the commercial paper.

In this case, DBS’ total direct exposure to CDOs would increase to $2.4 billion, Reuters cited a CLSA report as saying.

Investors’ appetite for the estimated more than US$510 billion of commercial paper worldwide has shrunk, after it emerged in Britain recently that some assets put up as collateral for debt may have a whiff of subprime mortgages.

Ms Wong clarified that the CDOs held in Red Orchid are ‘not exposed to the US sub-prime mortgage market at all’ and DBS ‘can fully fund any drawdown of the liquidity facility provided to the conduit’.

‘Red Orchid’s assets are mostly backed by AAA CDO assets as well as other bonds and loans. We do not expect these assets to default,’ said a bank spokesman.

Apart from Red Orchid, DBS does not have any other asset- backed commercial paper conduit which invests in CDOs.

Ms Wong noted: ‘DBS has one of the strongest capital positions of banks operating in Asia… We are comfortable with our present position and as always will monitor our risks closely.’


Source: The Straits Times 27 Aug 07

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