Shares in Asian and European banks tumbled on Tuesday, led by Japan’s MUFG and Belgian-Dutch Fortis, as investors dumped stocks on deepening concern about regional bank exposure to troubled United States mortgage lenders.
Financial shares in Japan, China and Taiwan lost between 4% and 7% as worries mounted over the health of US banks, even though Asian financials are underpinned by relatively more stable fundamentals, analysts and fund managers said.
Friday’s collapse of IndyMac Bancorp, the third-largest US bank failure, and problems at home financers Fannie Mae and Freddie Mac have further unsettled investors in the under-fire sector.
Europe’s bank sector fell to a five-year low as the worries spread. By 10.40am GMT the DJ Stoxx European banking index was down 5,5%, led by an 18% slump by Fortis as a regulatory probe into its recent fundraising plan exacerbated the sector’s brittle mood.
UBS, BNP Paribas and Royal Bank of Scotland all lost over 5% as fallout from the US subprime mortgage crisis posed a fresh threat to the US financial sector and global banking industry.
”The problem is the market can’t see the first green shoots coming through. It’s looking at 2009 as if it’s going to be the same as 2008,” said Mark Durling, analyst at British brokerage Brewin Dolphin. ”There are still very dark shadows out there.”
A bearish mood had spilled into Asia from the United States even if their economies have decoupled, said Elan Cohen, a Singapore-based portfolio manager with JPMorgan private bank, which manages over $400-billion in discretionary funds worldwide.
”What has not decoupled is the sentiment. In fact Asian markets have declined far in excess of the US since this downturn started in October last year,” Cohen said.
”Financials in Asia have strong capital ratios — they have capital adequacy ratios far in excess of the US and far in excess of what is required by the BIS,” he said. ”Balance sheets are not impaired, it is really just a matter of sentiment.”
Oversold banks
Cohen remains overweight Asian stocks but is increasing the proportion of US financial stocks in his portfolio because he believes they have been oversold.
US authorities have stepped in to offer emergency support for Fannie Mae and Freddie Mac, who finance half of US home loans, but initial relief was replaced on Monday by concern they need more funding — even though the backing of the US government has made Fannie’s and Freddie’s debt products popular among global investors, especially central banks in Asia.
Foreign central banks hold a total of $979-billion in agency-related debt, up 18% so far this year, according to the Federal Reserve.
Japan’s three largest banks — Mitsubishi UFJ Financial Group (MUFG), Mizuho Financial Group and Sumitomo Mitsui Financial Group — together had about ¥4,7-trillion ($44,3-billion) in debt securities from Fannie and Freddie as of the end of March.
MUFG had more than ¥3,3-trillion in agency debt, a company spokesperson said.
Mizuho’s ¥1,2-trillion exposure was concentrated in Ginnie Mae, another US housing agency, while Sumitomo Mitsui’s ¥220-billion investment was spread over US mortgage agencies and not just Fannie and Freddie, spokesperson for the respective banks said.
Koichi Ogawa, chief portfolio manager at Daiwa SB Investments in Tokyo, said the debt was not subprime but was backed by mortgages made to borrowers with strong credit.
”There is no problem with Fannie and Freddie debt. You are pretty much at the level of guarantee by the US government,” said Ogawa.
Sharp falls
US banks stocks tumbled on Monday and major banks followed suit worldwide, especially those with exposure to the US or to wholesale banking markets, where revenues have slumped.
In Taiwan, Cathay Financial shares fell 7% after a government agency pegged Taiwan’s exposure to Fannie and Freddie at more than T$600-billion ($20-billion).
In Hong Kong, China’s top lender ICBC and China Construction Bank fell over 4%. China’s biggest insurer China Life tumbled 5,3% and smaller rival Ping An Insurance dropped 7,1%.
In Australia, investors have been racked by financial sector woes, and they dropped again even though the biggest risk for banks there does is not exposure to toxic assets, analysts said.
The US banking woes also affected India, with shares of the country’s top banks falling more than 5%.
”Where is the large-scale loan default in the domestic market that can affect the Indian banking sector? It’s only sentiment, there’s no logic behind this kind of a sell-off in bank stocks, said Arun Kejriwal, strategist at research firm KRIS. – Reuters