In Global financial services we trust

Temasek released its latest set of financial results yesterday. In brief, Temasek's net profit doubled to SGD18.2b for the year ended March 2008 with its portfolio value increasing about 13% to SGD185b, helped by a SGD10b injection by the Singaporean government. The improvement of net profit from SGD9.1b posted last year was aided by asset sales of more than tripled to SGD17b from SGD5b a year ago. Temasek has warned of further contagion from the global credit crisis but continues to see long term opportunities in financials and would not cap its investment in that sector. Below is an interesting article on some of the reasons behind Temasek's relentless push to invest in global financial services companies that are currently facing tremendous distress but having a good long term potential. Come to think about it, we as investors should also be doing so, albeit on a smaller scale...

Bloomberg: Temasek Holdings Pte, Singapore's $130 billion sovereign wealth fund, said it has ``great confidence'' in Merrill Lynch & Co.'s Chief Executive Officer John Thain and plans to raise its stake. Temasek, Merrill's biggest shareholder, received U.S. antitrust approval yesterday to raise its stake to between 13 percent and 14 percent. Temasek first announced last month its plan to boost its holding in Merrill from 9.4 percent. Merrill has a ``great franchise which has existed through many crises through a long period of time,'' Micheal Dee, Temasek's senior managing director of international, said in a Bloomberg Television interview yesterday. Temasek invested about $5 billion in Merrill since Dec. 24 after Thain, 53, replaced Stan O'Neal, who was ousted following the firm's biggest quarterly loss in its 93-year history. Merrill's writedowns are about 10 percent of the more than $500 million of credit losses by banks amid the subprime meltdown.

``The bottom line is financial institutions are still asking for more capital,'' said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors, which manages about $108 billion. With sovereign funds, ``there's still plenty of capital out there, so they're looking for somewhere to park that money.'' Danielle Robinson, spokeswoman for Merrill, the third-largest U.S. securities firm, declined to comment yesterday.

`Long-Term Horizon'

Temasek, wholly owned by Singapore's finance ministry, has been increasing investments in global financial services companies to take advantage of a stock-market slump that erased about $10 trillion in market value in the past year. The MSCI World/Financials Index has dropped 33 percent in the period. ``Because our reserves are invested with a long-term horizon, this long-term orientation will keep us from selling in panic in a market downturn,'' Lim Hwee Hua, Singapore's minister of state for finance, said in Parliament today. ``The downturns also offer opportunities for our agencies to invest in good quality assets at prices that are attractive from a long-term perspective.''

The sovereign fund, run by Chief Executive Officer Ho Ching, 55, said July 29 it was putting a further $900 million in Merrill after it was compensated for the initial investment. Temasek said it will use a $2.5 billion reset payment for losses from its earlier purchase toward buying $3.4 billion of Merrill stock, and the securities firm will book the reset as an expense. Singapore's Sovereign Funds Government of Singapore Investments Corp. or GIC, the bigger of the city state's two sovereign funds, invested about $18 billion in UBS AG and Citigroup Inc. in the past year. GIC manages the country's reserves while Temasek was created 34 years ago to take over state assets including Singapore Airlines Ltd.

Merrill shares have fallen 55 percent since Temasek's first investment on Dec. 24. The stock fell 10 cents to $24.10 in New York Stock Exchange composite trading yesterday. Temasek, which yesterday said profit doubled in the year ended March, said its decision to further increase its stake was based on Thain and his management team. ``We had great confidence in John Thain; we had great confidence in the rest of the management and the board,'' said Dee, a former Morgan Stanley banker who joined Temasek this month. At least a dozen U.S. lenders and credit unions have been closed by state and national regulators since 2007 as mortgage markets collapsed. Columbian Bank and Trust Co. of Topeka, Kansas, closed Aug. 22, becoming the ninth U.S. bank to collapse this year. Columbia had $752 million in assets and $622 million in deposits.

Banking Stakes

Temasek is confident about its Merrill investment because the U.S. banking system is diversified enough with thousands of lenders to handle the failure of a small group, Dee, 52, said. ``The strength of the American financial system is the diversity and that no single bank or no single group of banks is really that large,'' he said. The U.S. Federal Trade Commission said in a statement that it cleared the transaction early, letting Temasek make an investment. Thain, the former Goldman Sachs Group Inc. president who also ran the New York Stock Exchange, was named chief executive officer of Merrill in November, the first outsider to lead the firm. His appointment was effective Dec. 1. Temasek is also the biggest shareholder of London-based Standard Chartered Plc and Singapore's DBS Group Holdings Ltd, and owns stakes in Barclays Plc, India's ICICI Bank and lenders in Indonesia, South Korea and Pakistan. The banks make up 40 percent of its portfolio. Chairman S. Dhanabalan said on Aug. 21 Temasek may buy more shares in Merrill and expects the stake will boost the value of its portfolio in the ``long term.'' Banks and securities firms have raised more than $350 billion in the past year after the writedowns and credit losses caused by the collapse of the U.S. subprime mortgage market, data compiled by Bloomberg show.

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