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China and Subprime Replies |
rffrydr
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HenryTo
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 Posted: Sat Aug 25, 2007 1:23 am Post subject: |
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Good question and good take. Thanks, Diesel, for the post.
At this point, everyone is just taking a guess on what the eventual default rate of these subprime holdings will be. BoC says A or higher, which is very different to AA or higher or just AAA. It will depend on the composition of their portfolio, as well as what vintage these subprime holdings are. A AA-rated security of 2004 vintage vs. the 2006 vintage will experience signficant differences in performance going forward.
http://www.bloomberg.com/apps/news?pid=20601039&sid=anqRdcz.pc6I&refer=columnist_gilbert
90% of the subprime ARMs that are going to reset in the next couple of years shown on the second chart in the following commentary will default, period.
http://www.marketthoughts.com/z20070711.html
That means that anything that is "only" AA-rated and that are of the 2005 vintage or after could face a loss of 100%. So I think my guess of 30% or Louis Gave's guess of 40% is probably not that far off - although my guess is that the loss will be spread out and hit earnings over the next couple of years, as opposed to only hitting earnings in 2008. |
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diesel
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| Posted: Fri Aug 24, 2007 3:06 am Post subject: |
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Louis Gaves take on this.
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This is noteworthy indeed. As a number of brokers have noted, the subprime exposure of BoC is equal to 117% of expected FY07 earnings. This means that if the holdings have to be marked down by 40%, the ‘08 earnings are going to take a big hit.
Of course, the Bank of China was at pains to underline that, in terms of assets, the exposure is minimal. However, the more relevant ratio is exposure vs. earnings, not exposure vs. assets, and this for a simple reason: Chinese banks have huge asset bases and very low ROA’s. This means that they can make anything look good through a comparison to assets!
Or, to put it another way, while the solvency of Chinese banks is definitely not at risk because of the CDO mess, their earnings most definitely are. So while the Chinese bank’s exposure is not a huge problem, and while it does not present a significant threat to China in a macro sense, it could impact their share prices. After all, Chinese banks are trading at rich valuations, partly because foreign investors want exposure to the Chinese growth story… The last thing investors want is yet more exposure to the CDO mess. Foreign investors are unlikely to pay rich multiples for this (you can get it on the cheap through all of the US banks!).
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nodoodahs
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| Posted: Fri Aug 24, 2007 2:04 am Post subject: |
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Now who would force the BOC to mark to market?
I would assume they're not trading these, but holding for yield. What does the actual default amount project to?
_________________
I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose. |
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HenryTo
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| Posted: Fri Aug 24, 2007 1:12 am Post subject: |
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Bank of China disclosures nearly $10 billion in securities backed by subprime loans. In the meantime, it is only increasing $152 million of its loan reserves in order to insure against "possible losses" in this portfolio - a rather pitiful number despite the fact that it is "rated A or higher."
http://www.bloomberg.com/apps/news?pid=20601087&sid=acot7fdcjFHo&refer=home
The downgrades are going to occur - and once they do, it is not going to be pretty for Bank of China and several others who still have these securities on his books. It is just like a slow-motion train wreck - everyone knows it's going to happen, but no one can stop it and everyone is now just hoping for the best - not a good combination when it comes to the financial markets. I would be surprised (depending on the vintage) if this portfolio doesn't lose 30% or more of its value in the upcoming weeks - unless there is some kind of bailout. |
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rffrydr
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