Tuesday, September 2, 2008

China Banks Cut holdings on FRE and FNM, dip into foreign currency loan business

Chinese Banks pared back on FNM and FRE portfolios to err on the side of caution. With foreign currency credit scarse and foreign currency reserve excessive, China banks will expand foreign currency loan business, such as syndicated-loans... SHANGHAI -- China's big banks, having trimmed their holdings of U.S. mortgage-related debt, are facing increasingly difficult decisions about how to invest their sizable foreign-currency holdings. Amid jitters about the future of Fannie Mae and Freddie Mac, China's four biggest listed banks have pared back their holdings in debt related to the two U.S. mortgage giants. At the end of June, the four banks held a combined $23.28 billion of debt issued or guaranteed by Fannie and Freddie. That's a small fraction of the trillions of dollars outstanding, but the reductions attracted interest as a possible gauge of broader sentiment toward such securities. In earnings conferences in recent days, several Chinese banks said they had trimmed their Fannie and Freddie portfolios since June. Bank of China Ltd., by far the largest holder of Fannie and Freddie securities among the four big banks, said it had sold or allowed to mature $4.6 billion of the $17.3 billion it held as of June 30 -- which was down from more than $20 billion at the end of last year. China Construction Bank Corp. said it had cut its Fannie and Freddie holdings to just above $2 billion by the end of July, down from $3.2 billion a month earlier. Bank of Communications Co. sold all of its $27 million in holdings in early July. Industrial & Commercial Bank of China Ltd., the country's biggest lender, said it held $2.7 billion worth of Fannie- and Freddie-related debt at the end of June, but didn't provide a comparison with previous months. Analysts said the banks were likely erring on the side of caution, paring their holdings to please investors and ease concerns about their earnings outlook. While Fannie's and Freddie's shares have been battered this year, their debt generally is still considered relatively low-risk. Zhang Jianguo, Construction Bank's president, told reporters last week that bonds issued by Fannie and Freddie are still "relatively safe." The U.S. government "has already made clear its guarantee" of the two companies' debt, Bank of China President Li Lihui said. Zhu Min, a Bank of China vice president, said the company "will adopt a cautious stance" in managing its foreign-exchange assets amid global economic weakness. The shift away from Fannie and Freddie debt further reduces an already dwindling array of attractive foreign-currency investment options, with meager returns on low-risk instruments like U.S. Treasuries and continued instability in major stock markets. Because most developed economies are expected to slow further this year, the global investment climate is unlikely to improve soon, analysts said. China's banks have significant overseas funds to deploy. Bank of China had $240 billion of overseas assets at the end of June, while the other three big lenders had a combined total of $219 billion. Some analysts said they see merit in Chinese banks expanding their foreign-currency loan businesses. They have lots of liquidity as many Western institutions are squeezed by the credit crisis, so the Chinese banks may be able to pick up market share in lending to attractive companies. "They have to deploy their liquidity in some way and at the moment Treasurys don't look very lucrative," said Warren Blight, a banking analyst at Fox-Pitt, Kelton (Asia) Ltd. "But with credit so scarce, they can do a bit more syndicated lending or even direct corporate lending as yields and spreads are getting more attractive on that front." Syndicated lending is one of the few bright spots in the banking business, analysts said, in part because borrowers have shied away from issuing debt in the face of higher yields. Using more of their overseas funds for corporate lending would help build Chinese banks' international experience. "Given the fact that a lot of Chinese companies are seeking overseas expansion, it's a good opportunity for cash-rich big Chinese banks to develop a syndicated-loan business," said She Minhua, a banking analyst at China Securities Co. Bank of China set up three centers earlier this year to manage its syndicated-loan business around the world. It has been involved in a handful of small but noteworthy syndicated-loan deals, including a $592 million deal in Indonesia in which it led a group of 17 other banks to finance a power project. Its BOC Hong Kong (Holdings) Ltd. unit participated in a planned $3 billion refinancing facility for telecom operator PCCW Ltd.

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