Asian Bank Stocks Are Worth Buying, Strategists Say

Asian banking stocks are worth buying as declines in the past two weeks more than reflect potential losses arising from U.S. mortgage defaults, according to strategists at Merrill Lynch & Co. and Deutsche Bank AG.

Financial-related stocks were among the region's worst performers in that period amid concern more lenders will follow Macquarie Bank Ltd. in declaring losses linked to U.S. subprime mortgages. The company yesterday said the drag on its earnings won't be as much as it earlier forecast.

``It's difficult to grasp how far this problem goes, but definitely in Asia, there's not much exposure,'' said Stephen Corry, a Merrill equity strategist in Hong Kong. ``Regional markets are poised for a rebound, led by financials.''

Bank stocks tumbled as two Bear Stearns Cos. hedge funds filed for bankruptcy protection because of rising delinquencies on subprime loans made to people with poor credit. Singapore's DBS Group Holdings Ltd. slid the past two days after saying it has investments linked to U.S. subprime mortgages.

Concern a housing slump in the U.S., the world's biggest economy, is spreading helped trigger a global equities sell-off that has wiped out more than $2 trillion of market value.

The Morgan Stanley Capital International Asia Pacific Index is down 6.7 percent from a record set July 24. A measure of financial stocks lost 8.6 percent, the second-worst performance among the regional benchmark's 10 industry groups.

`Insignificant Exposure'

Corry, 36, recommends investors buy Shinhan Financial Group Co. and Woori Finance Holdings Co., South Korea's second- and third-largest financial services companies, and MCB Bank Ltd., Pakistan's No. 2 lender. Mark Jolley, Deutsche Bank's regional strategist, favors South Korean and Taiwanese banks.

Bank shares ``seem to be the most obvious idea at the moment,'' Hong Kong-based Jolley said. ``I can't think of a reason why that's not right.''

Shares of Sydney-based Macquarie, Australia's largest investment bank, have shed 9.9 percent since its Macquarie Fortress Investments Ltd. unit, which had $873 million in two high-yielding funds, on July 31 said it was forced to sell assets to avoid breaching loan agreements. Shares of Babcock & Brown Ltd., Macquarie's biggest rival, are down 13 percent in that time.

Phil Green, Babcock & Brown's chief executive, on Aug. 1 said the company had ``insignificant exposure'' to subprime loans, helping the shares climb as much as 2.4 percent since then. The stock today rose 2.6 percent in Sydney.

`Selling Is Overdone'

Macquarie Fortress said yesterday the two high-yield funds lost 5 percent of their value, less than a July 31 forecast of as much as 25 percent. Macquarie stock climbed 6.1 percent today, part of a broader rally in the region, which boosted MSCI's finance index as much as 0.9 percent.

Macquarie is ``misunderstood by a lot of offshore investors,'' said Craig Saalmann, a Sydney-based credit strategist at JPMorgan Chase & Co. ``The company at its annual shareholders' meeting a few weeks ago did point to a very strong 2008 and a very strong investment banking pipeline. You've got to listen to management and what they're saying about future earnings.''

Shares of DBS, Singapore's biggest bank, rose 1 percent today, snapping a two-day, 6.7 percent slide. The lender said on Aug. 3 it has $187 million invested in collateralized debt obligations, or CDOs, based on asset-backed securities that have ``various exposures'' to U.S. subprime mortgages.

These asset-backed products amount to 22 percent of the $850 million the bank invested in collateralized loan and debt obligations, the Singapore-based lender said. The stock is one favored by Merrill's Corry, and he's sticking by his call.

Contained Risk

``Our analyst is assuming exposure of $1 billion,'' the strategist said. ``They've come out with $850 million, which is not great, but it's still less'' than estimated.

United Overseas Bank Ltd. shares climbed 4.1 percent today after plunging 9.2 percent in the past two days. CDOs make up less than 0.3 percent of the assets held by the bank, Singapore's second-largest.

Park Hae Choon, chief executive of Woori Finance's banking unit, on July 18 denied a Maeil Business Newspaper report of losses from U.S. CDO investments, saying the bank bought only high-grade bonds. The parent company on Aug. 1 posted a 9.4 percent increase in second-quarter profit that beat some investors' estimates.

A gauge of Taiwanese financial stocks has slumped 15 percent in the past two weeks, the second-biggest drop among 28 industry groups included in the benchmark Taiex index. It's valued at 16 times estimated earnings, less than the broader measure's 19 times.

`Screaming Buy'

Shares of Mega Financial Holding Co., Taiwan's second- largest financial services company, have tumbled 18 percent in that time. Executive Vice President Simon C. Dzeng said today that his company won't book any losses from investment in securities linked to U.S. subprime home loans.

``I would be pushing Korean banks and I think Taiwanese banks are at a massive bottom,'' Deutsche Bank's Jolley said. ``Even the Singapore banks are going to be a screaming buy but I'm not sure if we're there yet.''

There are signs the subprime crisis may persist for a while yet. The situation ``has a lot further to go,'' John Stewart, chief executive at National Australia Bank, said in an interview with the Australian Broadcasting Corp. yesterday.

Japan's Shinsei Bank Ltd. today said subprime losses reached $30 million and it has more than six times that amount of U.S. mortgage-backed securities that may be affected. Shares of the lender, which on July 30 said first-quarter profit rose 63 percent to 31.2 billion yen ($263 million), climbed 3.4 percent, paring their two-week drop to 5.3 percent.

``People are feeling the whole subprime crisis talk, Armageddon talk is overdone,'' said David Threadgold, a Tokyo- based analyst at Fox-Pitt Kelton Asia Ltd.

source:bloomberg.com