Asian Stocks Drop, Led by Banks, as Credit Concerns Increase

By Chen Shiyin and Chua Kong Ho

July 15 (Bloomberg) -- Asian stocks fell, dragging the region's benchmark index to the lowest since November 2006, on concern widening credit market losses will slow economic growth.

Mitsubishi UFJ Financial Group Inc. dropped after Japan's top three banks said they held $44 billion of debt issued by U.S. mortgage lenders including Fannie Mae and Freddie Mac, which the Treasury Department has pledged to support. Cathay Financial Holding Co. tumbled after disclosing $6.6 billion of debt in the two embattled U.S. companies. Matsushita Electric Industrial Co. fell after Nikko Citigroup Ltd. said earnings may decline.

The MSCI Asia-Pacific Index lost 2.2 percent to 129.53 at 1:40 p.m. Tokyo time. All of its 10 industry groups fell, with financial stocks accounting for 42 percent of the drop. Twelve stocks declined for each one that rose.

``Freddie and Fannie are basically quasi-sovereigns and many Asian governments and banks hold their debt,'' said Leslie Phang, the Singapore-based head of investments at the private-client unit of Schroders Plc, which oversees about $260 billion globally. ``Nobody expected them to blow up and it's shaken the foundations.''

Taiwan's Taiex Index slumped 3.3 percent, the biggest drop in the region. Japan's Nikkei 225 Stock Average declined 1.8 percent to 12,776.52, on course for its lowest close since April 1. Benchmark indexes fell in most of the region's markets.

U.S. stocks dropped yesterday, sending the Standard & Poor's 500 Index 0.9 percent lower. Financial shares slumped after last week's collapse of IndyMac Bancorp Inc. spurred speculation regional banks are short of capital.

Financial Stocks Slump

MSCI's Asian index has dropped 17 percent this year, led by financials, as the world's largest banks and securities firms reported more than $414 billion of writedowns and credit losses.

Mitsubishi UFJ, Japan's largest bank by market value, dropped 4.8 percent to 931 yen. Sumitomo Mitsui Financial Group Inc., the second-biggest, lost 4.8 percent to 795,000 yen, while smaller rival Mizuho Financial dropped 4.5 percent to 514,000 yen.

The three Japanese banks held a total of 4.7 trillion yen ($44 billion) in debt securities issued by U.S. government-backed mortgage finance companies including Fannie Mae and Freddie Mac, and by U.S. federal agency Ginnie Mae, as of March 31, according to the banks.

Yoshimi Watanabe, the head of Japan's financial regulator, today urged caution about holding Fannie Mae and Freddie Mac debt. Investor Jim Rogers said in an interview yesterday that a U.S. Treasury Department's plan to shore up the two companies is an ``unmitigated disaster.''

Cathay Financial, Taiwan's biggest listed financial services company, dropped 7 percent to NT$58.70, set for its lowest close since April 2006. The company said it hasn't incurred any losses from its investments in Fannie Mae and Freddie Mac.

Credit Crisis

Commonwealth Bank of Australia, the country's biggest mortgage provider, dropped 3.3 percent to A$38.82, poised for its largest retreat since June 10. JPMorgan Chase & Co. lowered its rating to ``neutral'' from ``overweight,'' because of a ``cautionary'' outlook for the company's 2008 earnings.

``Investor confidence is taking a hit from the state of the U.S. financial system,'' said John Padilla, who helps manage the equivalent of about $3.4 billion Metropolitan Bank & Trust Co. in Manila. ``Banks will stay out of favor as long as investors don't see an end to credit-market losses in the U.S.''

Australia & New Zealand Banking Group Ltd. lost 2.8 percent to A$17.31 after the Sydney Morning Herald said the bank recorded a A$275 million ($267 million) loss from selling shares it seized from collapsed margin lender Opes Prime Group Ltd.

Matsushita, the world's biggest consumer-electronics maker, lost 1.8 percent to 2,235 yen. The stock's rating was cut to ``hold'' from ``buy'' at Nikko Citigroup.

LG Electronics Inc., the world's fourth-largest maker of mobile phones, dropped 4.4 percent to 107,500 won in Seoul. CJ Investment & Securities Co. lowered its share-price estimate by 13 percent, citing lower earnings prospects in the third quarter.

To contact the reporter for this story: Chen Shiyin in Singapore at schen37@bloomberg.net; Chua Kong Ho in Shanghai at Kchua6@bloomberg.net.