BOC sets aside US$322m more for subprime losses

PUBLISHED : Wednesday, 31 October, 2007, 12:00am
UPDATED : Wednesday, 31 October, 2007, 12:00am


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Mainland lender raises provision for US$7.95b loan exposure

Bank of China, the world's sixth-largest bank by market capitalisation, has set aside an additional US$322 million against possible losses on its United States subprime-backed assets.

The country's second-largest lender yesterday revealed in a statement that it held in the third quarter US$7.95 billion in asset-backed securities and collateralised debt obligations (CDOs) tied to loans to less credit-worthy borrowers, down from US$9.7 billion in the second quarter.

The lender had set aside 1.1 billion yuan for subprime-backed collateralised debt obligations in the first half.

Possibly reflecting a worsening subprime problem, BOC more than doubled to 2.4 billion yuan its provisions for subprime loans in the third quarter.

Among the provisions for subprime investments, US$135 million was for subprime asset-backed securities and US$187 million was for subprime CDOs.

These represent 2.86 per cent and 0.19 per cent of investment securities respectively, down from 3.51 per cent and 0.27 per cent in the first half.

'Considering the inherent uncertainties of the US subprime mortgages market, the group will closely monitor the future developments of the market,' its statement said.

Meanwhile, BOC also set aside US$321 million directly for the 'reserve for fair value changes of available-for-sale securities', reflecting the depreciation of the fair market value of related subprime securities.

'The management expects the provision will gradually decline by the end of 2007, but it did not give any timeframe to sort out the problem,' said an analyst who engaged in a conference call with BOC yesterday.

Analysts remain cautious about the lender's losses related to subprime loans despite its reporting a slightly better than expected 40.1 per cent increase in net income in the first three quarters.

'It is no surprise to see higher provisions in the third quarter, since the market value of those subprime-related securities slumped from August,' said Samuel Chan, a JPMorgan analyst. 'There will be more to come in the fourth quarter.'

JP Morgan maintained its 'neutral' rating on BOC and estimated a 32 per cent increase in net profit to US$56.7 billion for the full year.

BOC's securities are rated 'A' or higher, the lender said in August. That indicates a borrower's ability to repay the debt is 'strong', according to Standard & Poor's.

'The market value of subprime-related CDOs and [asset-backed securities] continued to drop in October. If the cut-off date for the third quarter was exactly on September 30, we might expect a further subprime impact for BOC in the fourth quarter as well,' said an analyst from a credit rating agency who asked not to be named.

However, he added the subprime-related investment securities held by major mainland lenders tended to be short-lived.

He would expect a turnaround of the securities' value next year.

BOC posted net profit of 49.71 billion yuan or 18 fen a share for the first nine months.

Net interest income grew 26.7 per cent to 110.5 billion yuan, while net fee and commission income increased 87.9 per cent to 18.9 billion yuan.

BOC shares rose 2.07 per cent to close at HK$4.93 yesterday.

The bank's stock is the worst performing among all the listed state-owned lenders on the Hong Kong stock market this year, having gained only 10 per cent.

By contrast, China Construction Bank Corp has surged 72.7 per cent while Industrial and Commercial Bank of China has soared 45.4 per cent so far this year.