Huge provisions for bad and doubtful loans saw Union Bank of Hong Kong's attributable profit plunge 90.3 per cent to $32.95 million for the year to December. Heavy exposure to the mainland led to the bank making a provisions charge of $295 million, up a massive 409.5 per cent from the previous year. The poor result was also attributed to volatility in interbank rates. The bank's net interest margin dropped from 3.01 per cent in the second half of 1997 to 2.31 per cent in the first half of last year. However, by the second half of the year it rebounded to 2.44 per cent. Union Bank suffered severely from its mainland exposure, with $3.97 billion, or 27.5 per cent, of its loan book defined as mainland-related. About $3.33 billion - 23 per cent of the loan book - went to 'window' companies, of which $537.39 million was already overdue. Non-performing loans - on which interest is being placed in suspense or on which interest accrual has ceased - for the bank's mainland exposure stand at $660.78 million. This boosted the bank's combined non-performing loans to $1.3 billion, or 9.01 per cent, of its loans base, up from just 0.55 per cent in 1997. However, the market value of collateral held for the non-performing loans amounted to $848.59 million against $70.5 million the previous year. With the specific provisions of $205.23 million made, bad and doubtful loans were 81 per cent covered. Managing director and chief executive David Yau said: 'The bank has always maintained critical assessment of its asset quality, and has taken an aggressive stance towards any potentially problematic loans in 1998.' Mr Yau highlighted the bank's determination to substantially increase its provisions against the 1 per cent contraction in its pre-provisions loans, saying the move would 'render better assurance for 1999's profitability'. The bank allocated $23.2 million in general provisions as a precautionary measure, boosting the general provisions reserve in its balance sheet to $124.69 million. Volatility in interbank rates pushed Union Bank's funding costs up by 44.4 per cent, resulting in a 20 per cent reduction in net interest income to $421.33 million. This, added to a 31.7 per cent decline in non-interest income and a marginal 2 per cent reduction in operating costs, helped push pre-provisions operating profit down by 32.5 per cent to $313.94 million. Earnings per share were down 90.8 per cent to 11 cents, from the previous $1.20. No final dividend was proposed, against the eight cents paid at the interim stage.