Investors were generally thankful recent sub-prime loan related losses among Singapore banks weren't higher. At a time when US banks consistently announced billions and billions of dollars worth of exposure, and the CEOs of Merrill Lynch and Citigroup resigned, Singapore banks were generally unscathed. But at a time when Singapore's economy is booming and yet many legitimate local businesses still can't get loans, one has to ask why in the world Singapore banks would have any exposure to sub-prime loans at all! Our argument is: DBS, UOB and OCBC should focus on loaning money to Singapore businesses, rather than throwing money at Collateralised Debt Obligations (CDOs).

The earnings statements from the banks tell the story:

DBS reported third quarter enterprise loans of S$22.5 bln, up around 10% from the year earlier. But corporate and investment banking rose to S$45.6 bln, from S$32.7 bln. This is more than double the enterpise amount. DBS's CDOs were S$2.36 bln. None of them were in default, it says, but it took an S$85 mln charge for sub-prime concerns.

"A huge sigh of relief", is how CIMB's Kenneth Ng characterised DBS' earnings in a report dated October 29.

Similar story at OCBC, which had S$270 mln in exposures to the subprime issue, and it took a provision of S$221 mln in case these turned bad.

These exposures certainly aren't large, and the banks are sufficiently prudent to disclose their exposures (although – as we blogged previously – it took DBS two tries to get it right). But it does make you wonder why the banks even have such exposures.

As mentioned, the same earnings announcements documented how strong loan growth had been. Wouldn't it make more sense to lend money to Singaporean SMEs, which continually complain about how difficult it is to get a loan from a bank, than to be "investing" (read, gambling) on subprime Collateralised Debt Obligations. After all, what are sub-prime CDOs, than a funky financial product invented by investment bankers to make money out of Americans who should never have been granted a home loan in the first place.


Mark Laudi

To comment on this blog, visit the Investor Central Blog.

Should Singapore banks have ever invested in US subprime loans?

Tell us...
Yes, they need to diversify their risks across a broad spectrum of assets, including subprime CDOs
No, they should not have invested in subprime loans.
No, they should have put that money towards Singapore SMEs instead

Labels: DBS, OCBC, Singapore, subprime, UOB