A DIFFICULT operating environment, combined with appreciation of the yuan, has hit pre-tax profit at Bank of China (BOC). The Chinese banking group expected to announce pre-tax profits of about 10.5 billion yuan (about HK$9.76 billion) for last year, down 12.5 per cent from 12 billion yuan in 1994, according to Xinhua (the New China News Agency). The result would still make the leading foreign exchange bank in China the best earner among the country's state-owned commercial banks. Tao Liming, deputy director of the Institute of International Finance of the BOC's head office in Beijing, said foreign exchange business accounted for about 70 per cent to 80 per cent of all its businesses, and the depreciation of the yuan inflated 1994's results. The unification of the exchange rate in January 1994 saw the yuan effectively devalued by one-third, to 8.7 against the US dollar from 5.7, with the currency eventually rising to end that year at 8.4 yuan to the dollar. Mr Tao said the yuan appreciated against the greenback last year, so profit from foreign exchange business was smaller when translated into yuan. The yuan rose slightly against the dollar last year to close at 8.3. But Mr Tao admitted that the bank's profit suffered a real fall, if the exchange-rate factor was stripped out. 'On the whole, last year's business environment was very tough for all banks, not just us. Enterprises did not perform well due to the tight credit policy, which affected all banks' earnings.' Last year the local-currency operation was flat compared with slight gains a year earlier, while the growth in foreign exchange business was not big enough to fill the gap. The marginal difference between interest rates on deposits and loans had made yuan business very difficult to do, Mr Tao said. 'Take the one-year deposits and loans as an example: they both charge the same interest rate of 11 per cent. But there is cost involved in taking deposits, and we have to work very hard to ensure we at least cover the costs. 'The interest income on loans was unstable and was less than that of 1994. Although we did not see any obvious increase in bad debts, the proportion of poor quality assets was still high.' The BOC held domestic yuan deposits of 390.4 billion yuan at the end of 1995, 95.3 billion yuan more than a year earlier, Xinhua said. More than 70 billion yuan of increased deposits were individual savings. BOC's profits have been maintained at about 10 billion yuan over the last four years, mainly because of income from foreign currency business. Foreign exchange deposits increased by US$476 million to $27.09 billion. Foreign exchange lending came to $30.67 billion at the end of last year, up by $2.92 billion. Mr Tao expected better fortune this year with pre-tax profits reaching 1994's level of about 12 billion yuan. Banks should benefit from the central bank's gradual relaxation of interest rates and a wider interest rate gap between deposits and loans. The BOC handles the bulk of China's trade settlement, with the volume reaching reaching $137 billion last year.
