By Luo Jun and Bei Hu
August 23, 2007 (Update2)
SourceAug. 23 (Bloomberg) -- Bank of China Ltd., the nation's second-largest bank, said it holds almost $9.7 billion of securities backed by U.S. subprime loans, the most of any Asian company.
The Beijing-based bank set aside 1.15 billion yuan ($152 million) against possible losses on asset-backed securities and collateralized debt obligations backed by loans to borrowers with poor credit histories, it said in a statement today. The bank today announced first-half net income of 29.5 billion yuan.
Losses related to subprime loans may damp enthusiasm for Bank of China on a day when it reported a better-than-expected 51 percent increase in profit. The perceived risk of owning the company's bonds increased.
``It's not good news,'' said Winson Fong, who helps oversee $2.5 billion at SG Asset Management and declined to say whether he owns the stock. ``But compared with the profit, the impairment charge is manageable.''
The collapse in securities backed by subprime mortgages has caused losses at lenders from Japan to Australia, helping send Asian banking stocks lower in the past month. Bank of China, which accounts for more than two-fifths of foreign currency advances by Chinese banks, was also weighed down by 1.2 billion yuan in foreign-exchange losses in the period.
Bank of China's securities are rated ``A'' or higher, it said. That indicates a borrower's ability to repay the debt is ``strong,'' according to Standard & Poor's. Bigger rival Industrial & Commercial Bank of China Ltd. today said it had $1.2 billion of subprime-related securities.
Credit Swaps
Credit-default swaps tied to Bank of China's bonds widened by about 15 basis points to 68 basis points today, according to BNP Paribas SA prices. A basis point is 0.01 percentage point. Swap prices rise when investors perceive higher risk of default.
``In this kind of environment, people try to hedge their risk so they tend to be shaky and cautious about banks and financial institutions,'' said Andre Rattanavan, a Hong Kong- based credit derivatives trader at BNP Paribas.
Defaults on U.S. subprime loans are rising after originations reached a record $805 billion in 2005, according to JPMorgan Chase & Co. estimates.
Mitsubishi UFJ Financial Group Inc., Japan's biggest bank, said this month it has about 300 billion yen ($2.6 billion) of investments that incorporate subprime loans. Sixteen Taiwanese banks held a total $1.2 billion in securities linked to such home loans, the island's financial regulator said Aug. 9.
Minimal Default Risk
The MSCI Asia-Pacific Financials Index has lost 8.1 percent in the past month. The measure has recovered after plunging 17 percent between July 24 and Aug. 17.
At the end of last year, Chinese banks had about 6 percent of their assets invested in dollar-denominated debt, according to Citigroup Inc. analyst Tracy Yu. Most of it is in credits with minimal default risk, she wrote in a report this month.
``From our perspective, the Chinese government stands behind those banks, so probably it isn't going to be enough to adversely affect their credit ratings,'' David Marshall, managing director at Fitch Ratings in Hong Kong, said today in an interview.
Bank of Communications Ltd. said last week it has no investments in subprime-related assets. China Merchants Bank Co. this month announced it sold all its holdings of such assets last year at a profit.
Opening Up
Economic growth that reached 11.9 percent in the second quarter has allowed Chinese banks to increase profits by extending more loans and selling products ranging from credit cards to mutual funds. In addition, fees from stock trading have soared as the CSI 300 Index jumped 147 percent this year, the best performance among world benchmarks.
That hasn't sparked enthusiasm for Bank of China's shares, which have trailed those of Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp. in Hong Kong. The stock trades at 17.6 times estimated 2007 profit, a 23 percent discount to the average among Hong Kong-traded mainland banks, according to data compiled by Bloomberg.
Bank of China, founded in 1912 by Sun Yat-sen, known as the father of modern China, serves 118 million retail customers and 41,000 corporate clients. It held a monopoly on foreign-exchange dealings and overseas banking from 1949 to 1994 and was the first to engage in foreign currency-denominated loans, international syndicated loans, project financing and export credit.
The company has more than 600 overseas branches, about five times more than larger rival ICBC. It has outlets in 27 countries, including the U.S., U.K., Japan and Australia. International operations accounted for a quarter of its profit last year.
China's currency regulator this week said it will let Chinese citizens with a Bank of China account in the northern city of Tianjin buy Hong Kong stocks for the first time, opening the gate for China's $2.2 trillion of household savings to flow offshore.
To contact the reporters on this story: Luo Jun in Shanghai at
jluo6@bloomberg.net Bei Hu in Hong Kong at
bhu5@bloomberg.net .
Last Updated: August 23, 2007 07:02 EDT