Asian and European bank shares soared on Monday after the United States government took control of mortgage finance firms Fannie Mae and Freddie Mac in a bid to revive confidence in banks and the housing market.
The plan makes it more explicit that debt issued by Fannie and Freddie will be backed by the US government. It curbed worries that banks and other financial firms around the world face more big losses on their exposure to their bonds and other risky assets, analysts said.
It also sent a broader message that the housing market will be supported, lifting confidence across the sector.
”This is as clear a signal as anything that the US government intends to stand behind the US housing market and government money is being made available to support the housing market,” said Simon Maughan, analyst at MF Global in London.
”It doesn’t change the immediate outlook for jobs or any of the macroeconomic fears that people have, but it’s a potentially significant cash injection directly into the housing market, which is the number one source of the credit crunch.”
The DJ Stox European bank index soared 7,7% to 304 points by 8am GMT, led by rallies of over 10% by UBS, Royal Bank of Scotland, Barclays and Credit Agricole.
Asian banks had set the rally in motion. Japan’s largest banks rose more than 10% and MSCI’s index of Asia-Pacific banks outside of Japan jumped 5%, its biggest one day move since March.
The US bailout plan is set to leave shareholders in Fannie and Freddie last in line for any claims, but that is of little concern to investors in Asian and European banks.
”There is hardly any equity exposure of Asian bank ex-Japan in Freddie and Fannie,” said Todd Dunivant, head of regional banks research with HSBC in Hong Kong.
”But investors were concerned about the mark-to-market losses in debt and MBS [mortgage-backed securities].”
Financial firms have posted over $500-billion in credit losses and write-downs since credit markets seized up a year ago and their holdings of complex debt instruments tied to mortgages plummeted in value.
Japan’s industry leader Mitsubishi UFJ Financial rose 12% while number two lender, Mizuho Financial, and third-ranked Sumitomo Mitsui Financial both climbed 11%.
The European rally was across the board. Dexia was the strongest European stock with a 14% surge, and big names HSBC, Santander, Unicredit and BNP Paribas all rose over 5%.
Risk profile improves
The US government’s action, prompted by worries over the mortgage firms’ shrinking capital, was the latest in a series of emergency steps taken by US officials to prop up the wobbly housing sector and quell what is now a year-long crisis in credit markets that has helped push many economies toward recession.
In Hong Kong, Bank of China, which has been tipped to have the greatest exposure to Freddie and Fannie debt among the Chinese lenders, rose 4,6%. China’s third largest lender cut its debt and MBS holdings in the beleaguered US home financers to under $13-billion by end-August from $17,3-billion at the half-year mark.
Korea’s Kookmin Bank jumped 8%, Woori Finance surged 13% and Shinhan Financial Group rose 8%.
”Banks with higher portion of riskier assets are making the most gains. Woori Finance Holdings, which is said to hold more Fannie and Freddie-linked bonds than other banks, is jumping,” said Park Jung-hyun, an analyst at Hanwha Securities.
Bleeding stemmed
Policymakers welcomed the move. In Australia, Reserve Bank of Australia Governor Glenn Stevens said the US action was necessary to reassure shaky markets.
Credit spreads on Europe’s banks tightened sharply, reflecting the reduced risk for counterparties, analysts said.
But Masanobu Takahashi, chief strategist at Ichiyoshi Securities in Tokyo, cautioned it was too early to predict a full recovery for bank shares, which are still down 20% in Japan and 30% elsewhere the region so far this year.
”It’s just that bleeding from [the] US front has been stemmed, and it does not mean the overall economy will turn upward,” he said. ”We cannot expect that unless the governments take up measures that have impact on the economy.” – Reuters