Union Bank of Hong Kong has sustained a $557.09 million loss for the first half to June 30, becoming only the second SAR bank in the past decade to report a loss. The bank attributed the loss to a sharp increase in provisions for bad loans because of its high exposure to the mainland. A year earlier, it had a profit of $123.5 million. Provisions for bad loans amounted to $656.21 million, up from $38.04 million a year earlier. Union Bank's earnings setback came after a $464.08 million loss for last year announced in March by Hongkong Chinese Bank. However, Hongkong Chinese Bank returned to profitability in the first half of this year with earnings of $15.39 million. The bank appointed Raymond Li Wing-hung as its new chief executive officer in April. Union Bank last month appointed Chris Chan Chi-keung as its new managing director, replacing David Yau Man-tak. The bank's results are its worst since the mainland's China Merchants Group took a controlling interest in 1986. Analysts said they expected the troubles of Union Bank and Hongkong Chinese Bank to toughen the Hong Kong Monetary Authority's stance on pushing forward merger and acquisitions in the banking sector in an effort to make it more competitive. Union Bank yesterday also announced a one-for-two rights issue of new shares at $3.70 each, in a bid to raise $556 million to recapitalise. The issue, if successful, would raise its capital-adequacy ratio to 18 per cent from 14.1 per cent. Chairman Fu Yu Ning - who is also an executive director at China Merchants Group - described the Union Bank's provisioning policy and the rights issue as 'bitter medicine' that would lead it to recovery. However, Mr Fu said the bank would still need to make provisions for bad debts in the second half, although they would be substantially lower than they were in the first six months. Union Bank's Mr Chan said the amount of second-half provisions needed would depend on the progress of restructuring of corporate loan accounts in the mainland. Among these accounts are the well-publicised debt restructurings of Guangdong Enterprises (Holdings) (GDE) and Guangdong International Trust and Investment Corp (Gitic). Mr Chan declined to disclose the amounts the bank had loaned to these troubled mainland entities but said it had made a 20 per cent provision for GDE exposure and a 50 per cent provision for Gitic exposure. The bank's loans in the mainland totalled $3.7 billion at the end of June, or 28 per cent of its loan book. Non-performing loans amounted to $2.55 billion, or 19.5 per cent of its loan book - the highest level in the industry - up from $1.3 billion as at December 31 last year. Mr Chan said the bank had stepped up its efforts to recover its bad debts by overhauling the credit department and special asset team. In the first six months this year, $443 million in bad loans had been recovered. He said the bank would strengthen its co-operation with China Merchants Bank (CMB), which is owned by the same parent, in areas of debt recovery and new business ventures, making use of CMB's 166 mainland branches. Mr Fu said it was premature to forecast any merger or other forms of equity relationship between Union Bank and CMB, but co-operation would definitely increase.