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MARKET TUMBLE: Bank stocks hit by US recession, sub-prime fears

Sell-off symptomatic of broader sell-down, slowing in S’pore’s economy: analysts

BANK stocks were clobbered yesterday on continuing concerns of a possible recession in the United States, subprime lending woes and a general slowing down of the Singapore economy.

This comes on the back of the news that Citigroup reported its biggest loss in its 196-year history due to US$18 billion worth of write-downs from the sub-prime crisis. The fall also came on a day when the broad market came under selling pressure.

Shares of DBS Bank, South-east Asia’s largest lender, were among the top losers yesterday, shedding 62 cents or 3.3 per cent to end at $18.20, the lowest in a year.

Shares of United Overseas Bank (UOB), Singapore’s second-largest bank by market capitalisation, also featured among the top losers. They ended yesterday 48 cents or 2.7 per cent lower at $17.08, their lowest price in a year.

OCBC Bank shares dropped seven cents or 0.9 per cent to end at $7.61, their lowest in 11 months.

This mirrors the fate of bank stocks in the Asian region, where Japanese bank shares fell on worries about the persisting US sub-prime crisis. Shares of Mizuho Financial Group and Mitsubishi UFJ – Japan’s largest bank – plummeted after suffering losses related to US sub-prime lending.

Shares of Bank of China, the country’s third-biggest bank, also dropped, as did those of Kookmin Bank, South Korea’s largest lender by market value.

In Australia, shares of Commonwealth Bank of Australia, Macquarie Group and National Australia Bank also declined.

Analysts said the sell-off in shares of Singapore banks was symptomatic of a broader sell-down in the markets, and a slowing in Singapore’s economy due to recession fears in the US.

‘Bank stocks are taking the lead from the US, which appears to be going into recession,’ said Matthew Wilson, a banking analyst at Morgan Stanley. ‘This will be bad for Singapore, given its small and open economy.’

David Lum, an analyst at the Daiwa Institute of Research, said a recession in the US would have a knock-on effect on Singapore bank stocks as these are the bellwether for the economy.

‘GDP growth has slowed in Singapore,’ he said. ‘If financial markets are weak, there will be a spillover effect on banks since they are closely tied to the economy.’

Mr Wilson noted that underlying pressure from sub-prime problems in the US remains and the prospect of collateralised debt obligation (CDO) write-downs still looms. ‘Financial stocks globally are under pressure.’

But Mr Lum was of the view that the prices of local bank stocks were hit by factors other than the US sub-prime lending crisis. ‘The sell-down should not be due to sub-prime problems,’ he said. ‘Singapore banks don’t need capital, and their capital ratio looks strong.’

Operationally too, banks are falling victim to low interest rates, possibly depressing their share prices. ‘The Singapore interbank offered rate (Sibor) is falling, and is likely to stay low as the US cuts its interest rates,’ Mr Wilson noted. ‘This is negative for banks’ net interest margins.’

He also said mortgage loan growth, although strong, generates low earnings for banks with narrow spreads.

The local banks are due to report full-year earnings next month. Analysts are expecting to see more write-downs relating to the CDO exposure. ‘There will be more write-downs though not as much as in the third quarter,’ said Pauline Lee, an analyst at Kim Eng Securities. ‘We won’t see as much write-downs at UOB and OCBC, compared to DBS.’

 

Source: Business Times 17 Jan 08

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