Bank shares tumble on Fannie, Freddie worries

HONG KONG/LONDON (Reuters) - Shares in Asian and European banks tumbled on Tuesday, led by Japan's MUFG (8306.T) and Belgian-Dutch Fortis (FOR.BR), as investors dumped stocks on deepening concern about regional bank exposure to troubled U.S. mortgage lenders.

Financial shares in Japan, China and Taiwan lost between 4 and 7 percent as worries mounted over the health of U.S. banks, even though Asian financials are underpinned by relatively more stable fundamentals, analysts and fund managers said.

Friday's collapse of IndyMac Bancorp IMB.N, the third-largest U.S. bank failure, and problems at home financers Fannie Mae (FNM.N) and Freddie Mac (FRE.N) have further unsettled investors in the under-fire sector.

Europe's bank sector fell to a five-year low as the worries spread. By 6:40 a.m. EDT the DJ Stoxx European banking index .SX7P was down 5.5 percent, led by an 18 percent slump by Fortis as a regulatory probe into its recent fundraising plan exacerbated the sector's brittle mood.

UBS (UBSN.VX), BNP Paribas (BNPP.PA) and Royal Bank of Scotland (RBS.L) all lost over 5 percent as fallout from the U.S. subprime mortgage crisis posed a fresh threat to the U.S. financial sector and global banking industry.

"The problem is the market can't see the first green shoots coming through. It's looking at 2009 as if it's going to be the same as 2008," said Mark Durling, analyst at British brokerage Brewin Dolphin. "There are still very dark shadows out there."

A bearish mood had spilled into Asia from the United States even if their economies have decoupled, said Elan Cohen, a Singapore-based portfolio manager with JPMorgan private bank, which manages over $400 billion in discretionary funds worldwide.

"What has not decoupled is the sentiment. In fact Asian markets have declined far in excess of the U.S. since this downturn started in October last year," Cohen said.

"Financials in Asia have strong capital ratios -- they have capital adequacy ratios far in excess of the U.S. and far in excess of what is required by the BIS," he said. "Balance sheets are not impaired, it is really just a matter of sentiment."

OVERSOLD BANKS

Cohen remains overweight Asian stocks but is increasing the proportion of U.S. financial stocks in his portfolio because he believes they have been oversold.

U.S. authorities have stepped in to offer emergency support for Fannie Mae and Freddie Mac, who finance half of U.S. home loans, but initial relief was replaced on Monday by concern they need more funding -- even though the backing of the U.S. government has made Fannie's and Freddie's debt products popular among global investors, especially central banks in Asia.

Foreign central banks hold a total of $979 billion in agency-related debt, up 18 percent so far this year, according to the Federal Reserve.

Japan's three largest banks -- Mitsubishi UFJ Financial Group (MUFG), Mizuho Financial Group (8411.T) and Sumitomo Mitsui Financial Group (8316.T) -- together had about 4.7 trillion yen ($44.3 billion) in debt securities from Fannie and Freddie as of the end of March.

MUFG had more than 3.3 trillion yen in agency debt, a company spokesman said.

Mizuho's 1.2 trillion yen exposure was concentrated in Ginnie Mae, another U.S. housing agency, while Sumitomo Mitsui's 220 billion yen investment was spread over U.S. mortgage agencies and not just Fannie and Freddie, spokeswomen for the respective banks said.

Koichi Ogawa, chief portfolio manager at Daiwa SB Investments in Tokyo, said the debt was not subprime but was backed by mortgages made to borrowers with strong credit.

"There is no problem with Fannie and Freddie debt. You are pretty much at the level of guarantee by the U.S. government," said Ogawa.

SHARP FALLS

U.S. banks stocks tumbled on Monday and major banks followed suit worldwide, especially those with exposure to the United States or to wholesale banking markets, where revenues have slumped.

In Taiwan, Cathay Financial (2882.TW) shares fell 7 percent after a government agency pegged Taiwan's exposure to Fannie and Freddie at more than T$600 billion ($20 billion).

In Hong Kong, China's top lender ICBC and China Construction Bank (0939.HK) fell over 4 percent. China's biggest insurer China Life (2628.HK) tumbled 5.3 percent and smaller rival Ping An Insurance (2318.HK) dropped 7.1 percent.

In Australia, investors have been racked by financial sector woes, and they dropped again even though the biggest risk for banks there does is not exposure to toxic assets, analysts said.

The U.S. banking woes also affected India, with shares of the country's top banks falling more than 5 percent.

"Where is the large-scale loan default in the domestic market that can affect the Indian banking sector? It's only sentiment, there's no logic behind this kind of a sell-off in bank stocks, said Arun Kejriwal, strategist at research firm

KRIS.

(Additional reporting by Steve Slater in London, Aiko Hayashi and David Dolan in Tokyo, Geraldine Chua in Sydney and Saeed Azhar in Singapore; Editing by Anshuman Daga and David Holmes)