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PRC banks disclose subprime exposure

China's banks are just beginning to disclose figures on their exposure to the US subprime mortgage crisis -- and so far the reaction is mixed.

Bank of China (中國銀行) saw its Hong Kong stock price fall by as much as 8.1 percent yesterday as investors sold shares in reaction to the bank's report it holds US$9.65 billion in subprime asset-backed securities and collateralized debt obligations, or CDOs. That's 3.8 percent of its total securities investments.

But in the Chinese mainland, where the state-controlled press ran headlines touting the minimal risks faced by two of the country's biggest banks from the US credit crunch, Bank of China's shares rose early yesterday.

The bank's Shanghai-traded shares ended the day up 1 percent to 6.16 yuan (US$1.42). Its Hong Kong shares were fell 5.4 percent to HK$3.87 (US$0.92), despite stronger-than-expected first-half earnings.

As the most international of China's four big banks, with a quarter of its earnings from overseas business, Bank of China is likely to have the largest exposure to subprime mortgage-backed securities and CDOs.

Those two kinds of securities have lost value recently amid rising subprime mortgage defaults and a credit squeeze.

Bank of China's Hong Kong unit, BOC Hong Kong (Holdings) reported it had US$1.6 billion in subprime-linked securities, making up 1.2 percent of its total assets.

The parent bank said it has seen no defaults on any of its subprime-linked securities. However, it made "impairment charges'' for potential losses amounting to 1.15 billion yuan in its earnings report on Thursday.

However, since the asset-backed securities all had ratings of "A" or above, analysts say they see little risk to the bank from the credit crisis.

Bank of China denied a report earlier this month by a Chinese financial magazine, Capital Week, saying it risks losses amounting to 3.85 billion yuan through such investments.

The magazine, citing "accounting estimates," put potential losses for six major Chinese lenders from subprime-related securities at 4.9 billion yuan.

China's biggest lender, Industrial & Commercial Bank of China (ICBC, 中國工商銀行), said on Thursday that its subprime mortgage-backed securities were valued at US$1.23 billion by the end of June, accounting for only 0.3 percent of its total securities investment.

"ICBC did have a loss from the investment if calculated at the current market value of the securities," Xinhua quoted bank president Yang Kaisheng (楊凱生) as saying. "But the loss is not significant and well within ICBC's capacity to bear."

So far this year, it had been a banner year for China's big banks.

ICBC said its first-half net profit rose 62 percent from a year earlier to 41 billion yuan, boosted by higher interest income and an expansion of its fee-based businesses.

Bank of China's net profit in the first six months rose 52 percent to 29.5 billion yuan.

China Construction Bank (中國建設銀行), another big-state lender, is scheduled to report earnings over the weekend.

Chinese banks and other financial institutions have relatively less exposure to international market trends, and so far, the country's own stock markets have shrugged off worries over the US credit crisis.

In a report released yesterday, ratings agency Standard & Poor's said Asian economies would be able to weather the turmoil in global stock and credit markets without "major reversals."

"Asian economies have improved their banking systems, reined in fiscal deficits, brought down external debts, built up foreign exchange reserves and improved their current account balances," credit analyst Ping Chew (周彬) said in a statement.

However, Chew noted increasingly vulnerability for some central banks because of the fact that lower-quality borrowers have migrated to the region in search of high returns.

For China and most of Asia, the greater worry is over whether the problem might spill into the broader world economy, sapping demand for imports and hurting global growth.

So far, though, China's markets remain bullish.

The benchmark Shanghai Composite Index topped 5,000 for the first time on Thursday. Yesterday it gained 75.18 points, or 1.5 percent, to close at a record high 5,107.67.
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