UPDATE 1-Little subprime fallout for Asia banks, investors wary

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By Tony Munroe and Umesh Desai

HONG KONG, Aug 3 (Reuters) - Asian banks, domestically focused and risk averse after the Asia crisis, should see few losses from the U.S. subprime meltdown, rating agencies said, but investors worry lenders could get caught in the maelstrom.

Moody's Investors Service said on Friday that the impact of the subprime crisis on Asia's lenders would be limited, with the largest exposure among the biggest banks through holdings of mortgage-backed securities and collateralised debt obligations. [ID:nWNA7262]

Standard & Poor's said Japanese banks have about $8 billion of subprime-related securities, citing the Japanese Bankers Association, while a small number of financial services firms in Taiwan have a much smaller combined level of exposure. [ID:nSPWAcEJwa]

For almost all rated banks and insurers in Asia Pacific, subprime mortgage-related losses are likely to be "either minimal or manageable," S&P said.

"Asian banks are not lending directly to U.S. subprime borrowers," said Moody's analyst Deborah Schuler.

Still, investors in regional financial stocks remain nervous as bad news from the U.S. subprime crisis and a resulting credit crunch roil global markets.

Shares in Bank of China (3988.HK) fell as much as 2.3 percent on Friday, lagging the market, a day after Goldman Sachs warned in a note that the country's second-largest lender may hold subprime mortgage-backed securities in its U.S. portfolio.

On Thursday, Taiwan financial stocks fell to their lowest level in almost seven weeks after mid-sized Taiwan Life Insurance (2833.TW) said it had booked a T$428 million (US$13 million) loss after writing off its entire investment in a collapsed hedge fund managed by Bear Stearns Cos. Inc. BSC.N.

COMING CLEAN

Analysts expect more banks to come out of the closet and disclose subprime-related exposure when they report earnings.

Tahnoon Pasha, Hong Kong-based head of equity investments at MFC Global Investment Management, said banks that have invested in subprime-related securities may take a hit to the bottom line but will not be structurally weakened.

"It isn't going to put the companies at risk, but it may put earnings at risk for a period in time," Pasha said.

Mitsubishi UFJ Financial Group Inc. (8306.T), Japan's top bank, is the most exposed of the country's three large lenders to the subprime market, with about 300 billion yen (US$2.5 billion) in related instruments, mainly asset-backed securities, as of mid-July, a spokesman said.

Graeme Knowd, a banking analyst at CLSA in Tokyo, said Japan's banks have little exposure relative to their size and will not be forced to unload their holdings: "The Japanese banks can sit it out, they are not firesellers."

KEEPING IT LOCAL

In general, Asian banks are locally focused and conservative after the harsh lessons of the Asian financial crisis of 1997-98, favouring plain-vanilla investment grade bonds, often under the strict guidance of regulators. Robust growth in countries such as China and India means banks don't need to look abroad for growth.

Asia, for example, accounts for less than 10 percent of the market in CDOs, according to Royal Bank of Scotland. Moody's said much of that exposure is in the highest-rated tranches.

Only a handful of Asian financial institutions have reported ill-effects of the U.S. subprime mortgage crisis.

In the highest-profile case, Australia's Macquarie Bank MBL.AX warned on Wednesday that retail investors faced losses of up to 25 percent in two of its investment funds amid the fallout from the U.S. subprime crisis.

The disclosure, the third in as many weeks by an Australian fund manager, sent shares in the country's top investment bank skidding by 10 percent.

Last week, top Japanese brokerage Nomura Holdings (8604.T) said it may pull out of the U.S. mortgage market and booked a 34.3 billion yen (US$288 million) pretax loss at its U.S. unit.

Bank of China downplayed concerns about its exposure.

"We have large investments in the U.S., but the proportion of CDOs in terms of total investment is small. The U.S. sub-prime problem will not affect our first-half result," said Bank of China spokesman Wang Zhaowen.

UBS noted that regulations prevent Chinese banks from investing in non-investment grade debt securities.

"Nevertheless, we think there could be negative near-term sentiment arising from this uncertainty, before possible interim disclosures are made," UBS analysts wrote in a research note. (US$1 = T$32.87 = 119.13 yen) (Additional reporting by Zhou Xin in Beijing, Michael Smith in Sydney, David Dolan in Tokyo, and Kennix Chim and Ian Chua in Hong Kong)