5.1b yuan loss prompts call for BOC to trim forex exposure

Bank of China, the mainland's second-largest lender, last year booked a 5.1 billion yuan net foreign-exchange loss, prompting one of the bookrunners of its public float to call for a reduction in its foreign-exchange position.

UBS expects the Beijing-based lender to post further foreign-exchange losses of 4.3 billion yuan this year and three billion yuan next year on the assumptions that the Chinese currency appreciates to 7.80 yuan against the US dollar by the end of this year and 7.50 yuan by the end of next year.

Last year's actual loss represented 4 per cent of BOC's revenue and 9.4 per cent of its pretax profit, according to a pre-deal research by the investment bank, which, along with Goldman Sachs and BOC International (BOCI), is a bookrunner of the mainland bank's initial public offering later this month.

The forecast losses for this year and next would represent 7 per cent and 4 per cent of projected profits in those years, UBS said.

As the mainland's largest foreign-exchange bank with 43.3 per cent market share of the country's foreign-currency loans and 40.9 per cent of its deposits, BOC was more exposed than its domestic peers to the yuan's 2.5 per cent appreciation to 8.07 yuan against the US dollar at the end of last year.

'The surprising thing is that it has an open on-balance-sheet foreign-currency position of US$60 billion and a net foreign-currency position of US$39 billion after factoring in off-balance-sheet hedges, including an US$18 billion hedge through an option with Huijin [its controlling shareholder],' the UBS report said.