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SUB-PRIME HITS: Bank of China may post 2007 loss on write-down

SCMP report heightens concerns about China’s exposure to crisis

(BEIJING) Bank of China might post a 2007 loss because of a big write-down on billions of dollars of US subprime related investments, a newspaper reported yesterday, sending shares in the lender tumbling.

Quoting unidentified sources, the South China Morning Post said that Chinese banking regulators had warned the country’s leadership that Bank of China and two other state banks would make provisions for all their assets hit by US mortgage defaults.

The report heightened growing concerns about China’s exposure to the sub-prime crisis, which has hammered earnings of major European and Wall Street banks, prompting steep share falls and capital injections to shore up balance sheets.

Analysts, however, expressed doubts that Bank of China would make full provisions for all its sub-prime related assets in one go. The bank said that its sub-prime related assets were worth US$7.95 billion at the end of September.

Samuel Chen, a banking analyst at JP Morgan, said that write-downs would hurt fourth-quarter earnings but he still expected the bank, which earned more than US$6 billion in the first nine months, to post a full-year profit.

‘Given the US sub-prime crisis is getting worse, I expect Bank of China to raise its write-off to between US$800 million and US$1 billion in the fourth quarter,’ Mr Chen said. ‘If the bank writes off more than US$1 billion, there is a possibility that it will generate a fourth- quarter loss.’

The other two banks mentioned in yesterday’s report, Industrial Commercial Bank of China and China Construction Bank, have said that they held US$1.23 billion and US$1.06 billion respectively in sub-prime related investments.

Hong Kong-listed shares in Bank of China, the country’s flagship foreign exchange lender, fell 4.7 per cent to HK $3.43 on fears that a one-off write-off would hit fourth-quarter results, due to be announced in April.

Hong Kong stocks dived yesterday in their worst one-day fall since September 2001, as a US economic stimulus package failed to calm investor nerves about a possible US recession. The benchmark Hang Seng Index ended down 5.5 per cent at 23,818.86, in its worst single-day percentage loss since September 2001.

The China Enterprises index of H-shares, or Hong Kong-listed shares in mainland companies, dived 7.1 per cent.

A bank spokesman in Beijing declined to comment.

Bank of China made a net profit of 45.5 billion yuan (S$9 billion) for the first three quarters of 2007, after booking its US$322 million impairment allowance for US sub-prime mortgage- backed bonds in its third-quarter account.

The bank surprised markets in August by announcing that it held US$9.65 billion of sub-prime related securities and in October, it booked US$643 million in provisions and reserves for sub-prime related investments.

It also set aside US$321 million of reserves against its balance sheet to reflect depreciation in the fair value of the sub-prime related securities.

BNP Paribas has lowered its 2007 and 2008 earnings estimates for Bank of China by 9 per cent and 12 per cent respectively to 46.9 billion yuan and 51.9 billion yuan, because of expected write-offs and falling fee income as Chinese stock markets cool.

BNP expects the bank to write off 17.5 billion yuan, or around US$2.4 billion, in 2007 and the same again for 2008 because of the sub-prime crisis.

Chinese officials are increasingly voicing concern about the fallout of the sub-prime crisis, backing away from earlier confident judgments that the country was largely insulated.

The semi-official China Business News yesterday reported that a special task force comprising officials from several government agencies recently made an assessment of the potential impact of the sub-prime loan crisis on Chinese banks. ‘The conclusion they have drawn is not very positive,’ the paper said, without citing specific sources.

 

Source: Reuters (Business Times 22 Jan 08)

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