Bank of China

BOC investors fear subprime impact

PUBLISHED : Monday, 24 March, 2008, 12:00am
UPDATED : Monday, 24 March, 2008, 12:00am

The prospect of further losses from investments in United States subprime-related securities is likely to loom large in the minds of shareholders when Bank of China and its Hong Kong subsidiary announce their annual earnings results tomorrow.

Bank of China, the mainland's third-largest lender, had set aside bad-debt provisions of US$794 million as of the end of September last year.

But market watchers expect tomorrow's report to show provisioning has been raised to cover revaluation losses because of the deterioration in market conditions since then.

The puzzle, however, is the size of the likely increase in provisions and this has not been helped by the fact that the bank has not given shareholders a profit forecast.

'BOC is the only listed mainland bank that hasn't given a profit forecast, and earnings will likely lag behind its peers,' said Credit Suisse in a profit preview, adding that last year's earnings would likely be up just 1 per cent on the profit of 43.35 billion yuan (HK$47.89 billion) in 2006.

Earnings forecasts from other analysts varied widely from an increase of 1.2 per cent to a jump of 24.7 per cent to 53.41 billion yuan. The rare lack of consensus reflected the uncertainty in the marketplace over the level of subprime-related provisioning likely to emerge in the results.

BOC's exposure to subprime debt investments, mainly high-risk mortgage loans and derivative contracts written on these assets, declined to US$7.95 billion at the end of September last year, from US$9.65 billion at the end of June.

In his most recent comment on the exposure, bank chairman Xiao Gang stressed that sufficient provisioning had been made for all of the bank's holdings in subprime-related collateralised debt obligations.

Ratings agency Standard & Poor's estimated that additional provisions due to be disclosed could be absorbed under reasonable stress scenarios, and were likely to be less than US$3.4 billion or 50 per cent of the bank's net profit of 49.7 billion yuan in the first three quarters of last year.

The lender's Hong Kong unit, BOC (HK), is expected to post modest net profit growth of 3.05 per cent for last year, with earnings likely to come to HK$14.43 billion compared with HK$14 billion a year ago, according to the average forecast of 23 brokers polled by Thomson Financial.