S&P: Asia-Pacific Banks/Insurers U.S. Subprime Loan Impact Limited

In a bulletin from its Singapore office Standard & Poor’s Ratings Services announced the results of a survey it conducted of rated Asia-Pacific banking and insurance entities to determine their exposure to U.S. subprime mortgage-related instruments. It concluded that in almost all cases “their exposure to these instruments is either minimal or manageable at this time.”

S&P said it had generally classified rated Asia-Pacific banking and insurance entities with potential subprime problems into three groups, as follows:
–Group 1. The vast majority of rated entities have negligible exposure. This includes almost all large Japanese banks.
–Group 2. A small minority of entities have exposure which Standard & Poor’s believes to be somewhat significant but manageable. This group includes a small number of Taiwanese financial services groups. We currently anticipate that expected credit losses from such investment holdings will not materially erode each individual entity’s equity base.
–Group 3. A few entities are significantly exposed in our view. However, the quality of investment holdings is at the top end of the credit rating spectrum. Consequently, while there might be a book loss stemming from market reevaluations, Standard & Poor’s projects that the eventual credit loss would be minimal.

S&P said the results of the survey confirmed its expectation that, “the prudential limits and diversity requirements of investments in offshore and structured products that are embedded in the individual risk management systems of rated Asia-Pacific banking and insurance entities generally contain low levels of exposure to issues associated with the U.S. subprime market.”

The rating agency also noted: “While the exposure of Japanese banks individually is small, collectively and in absolute terms, it is significant; the Japanese Bankers Association estimate that the sector is exposed by about US$8 billion. Although a full write-down is highly unlikely, such a scenario might still be absorbed by the Japanese banking sector as a whole, given its asset size and profit generation level.

“The total exposure of the rated Taiwanese financial services groups is far less than it is in Japan.”

S&P added that it “continues to maintain its ‘Positive’ rating outlook on the Bank of China Ltd. (BBB+/A-2), in mainland China, notwithstanding that the bank, which would be classified in group 3, has exposure equivalent to a substantial percentage of net profit and equity. These holdings are currently understood to be of a high quality. Should the quality prove otherwise, the bank’s equity base might be significantly impacted. In this unlikely event, this might possibly lead to Standard & Poor’s electing to downgrade its issuer credit rating on the bank by a notch.”

Source: S&P