Risk linked with Asian banks ‘mispriced’, says RBS

The credit risk associated with Asian banks is being mispriced by the financial markets and the region’s relatively stronger credit outlook, compared with Europe and the US, makes bank debt potentially an attractive investment opportunity, according to research by Royal Bank of Scotland (RBS).

The impact on Asian banks from the current credit crisis has been minimal in sharp contrast to the effect on banks in the US and Europe “with no destruction of capital, and with losses that have been absorbed with earnings”, the report, Asia Bank Compass, said.

RBS estimates that Asian banks account for 2%, or $2.8 billion, of the global $140 billion in write-downs linked to exposures from subprime and collateralised debt obligation. “Just two banks in Asia have experienced negative ratings actions as a result of the crisis,” the report said. These banks are Japan’s Mizuho and Hong Kong’s Citic Ka Wah Bank.

The UK bank’s credit research team believes Asian bank debt will outperform Asian high yield corporate and sovereign debt as well as European and US bank debt in 2008.

The report, released on February 6, added that bank exposure to monocline insurers is similarly limited compared with the exposures of financial institutions in Europe and the US. Monocline insurers are used by market participants to wrap credit instruments to bolster the credit rating of structured instruments.

Large monolines like Ambac, MBIA and FSA are expected to lose their triple-A ratings unless they receive a bail out by a consortium of the world’s leading banks aimed at bolstering their flagging capital positions.