Banks take HK$963.6m subprime hits

PUBLISHED : Thursday, 06 March, 2008, 12:00am
UPDATED : Thursday, 06 March, 2008, 12:00am

Wing Lung Bank and Chong Hing Bank have not been spared the bane of the subprime mortgage crisis in the United States, disclosing related provisions totalling HK$963.63 million at their results announcements yesterday.

Market watchers fear more provisions are required as the US housing market slump looks set to worsen.

Without any business presence in the United States, the subprime exposure of the two Hong Kong banks was indirect - through their investments.

Wing Lung wrote down HK$131 million or 15 per cent of the book value of its investments in collateralised debt obligations (CDOs), and HK$463 million or 60 per cent of the book value of its structured investment vehicles (SIVs).

The bank has eight CDOs valued at HK$858 million and five SIVs, including Whistlejacket Capital managed by Standard Chartered Bank with a book value of HK$774 million.

Chong Hing unveiled HK$369.63 million of provisions for SIVs, representing 65 per cent of its total SIV investment of HK$568.21 million.

After the announcements, Wing Lung shares dropped 5.58 per cent to HK$89.65, while Chong Hing's fell 1.69 per cent to HK$16.26.

The provisions largely dragged down their bottom line despite the strong growth in net fee and commission incomes that benefited from the buoyant stock and property markets.

Despite strong domestic performance, Wing Lung's net profit last year slid 14.6 per cent year on year to HK$1.37 billion. Its operating profit before impairment losses actually rose 18.7 per cent to HK$2.06 billion.

Chong Hing posted earnings of HK$505.03 million for the period, up only 0.38 per cent. Compared with Wing Lung, its operating profit before impairment losses had surged 44.39 per cent further to HK$777.8 million.

'I was surprised by the apparently big impact that the subprime crisis had on these banks' results,' said an analyst at a US investment bank.

Wing Lung executive director and general manager Chung Che-shum would not comment if further provision for Whistlejacket was needed but noted that the fund only made up 10 per cent of its SIV portfolio. He said enough provisions had been made for its SIVs and CDOs.

Chong Hing executive director Frank Jin Shui-sang said the lender had no investment in CDOs or other subprime-related products and the chance for more provisions was slim.

'We have written off 100 per cent of our holdings in Whistlejacket Capital, and the remaining SIV holdings are products from HSBC and Citibank, which have promised to provide liquidity support,' Mr Jin said.

An analyst who declined to be named said: 'The disclosure of provisions from these two small banks is disappointing, particularly with Wing Lung, which is relatively conservative among the city's lenders.'

He expected Wing Lung to make further provisions for its investment in CDOs this year, as it made only a 15 per cent write-off on them last year.

A report by Goldman Sachs predicted such write-offs last month following Standard Chartered's announcement that it had withdrawn a plan to provide liquidity support for Whistlejacket Capital.

'We believe Chong Hing Bank, Citic International Financial Holdings, Wing Lung Bank and Wing Hang Bank are holders of Whistlejacket Capital notes and expect 100 per cent write-offs implemented over the second half of 2007 and the first half of 2008,' the report said.

In December, Hong Kong Monetary Authority chief executive Joseph Yam Chi-kwong warned that some banks holding subprime-related structured products might slip into the red.

Wing Lung and Chong Hing declared final dividends of HK$1.50 and 44 HK cents per share, respectively.