The Wall Street Journal-20080122-Bank of China-s Subprime Hit- Up to --36-2 Billion- Early View Seems Low- Analysts Now Think- Transparency Concerns
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Bank of China's Subprime Hit: Up to $2 Billion; Early View Seems Low, Analysts Now Think; Transparency Concerns
Bank of China Ltd. appears increasingly likely to report a large write-down on its investments in U.S. mortgage securities, illustrating the broadening reach of the global financial downturn -- and how one of China's biggest lenders was less astute at avoiding the problem than it initially thought.
Analysts estimate that the state-owned lender, traditionally the most international of the country's big banks, may have to write off a quarter of the nearly $8 billion it holds in securities backed by subprime mortgages. While that still would leave the bank profitable for last year, it would be far larger than the $322 million the lender said it had set aside for such losses when it announced third-quarter results, the last time it publicly addressed the matter.
The possible subprime losses also raise questions about transparency at China's banks, which list shares for international investors in Hong Kong and domestically in Shanghai -- and which are among the biggest banks in the world by some measures.
Analysts said they can make only educated guesses at how much money Bank of China's subprime investments lost last year because China's rules don't require it to disclose the total until April, when it announces full results for 2007.
The same is true for other big Chinese lenders, including Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp., although their total holdings of U.S. mortgage securities are much smaller.
"We don't have a good read" on the current value of mortgage holdings at Bank of China and other Chinese lenders, said Charlene Chu, a senior director at Fitch Ratings China. The lenders "have not been transparent" about the ratings on the mortgage securities they own.
Wang Zhaowen, a Bank of China spokesman, declined to disclose the size of the bank's losses, saying figures still were being audited.
The benchmark Shanghai Composite Index yesterday fell below 5000 for the first time this year, shedding 5.1% to close at 4914.44, amid a world-wide selloff. Bank of China's Shanghai-listed shares slid 4.1% to 6.25 yuan (86 cents).
Underlining the concerns, Jiang Dingzhi, vice chairman of the China Banking Regulatory Commission, warned in a statement on the agency's Web site that China's banks will "see rising credit risks, with nonperforming loans more likely to rebound" as they face a host of economic uncertainties.
Mortgage-backed securities have been notoriously hard to value, because trading tends to be thin. Nevertheless, financial institutions in the U.S. and Europe have reported tens of billions of dollars in losses on such securities. Those losses have forced the institutions to seek capital injections from investors in China, Singapore, Kuwait and other East Asian and Middle Eastern countries.
Bank of China's total exposure to U.S. subprime investments is the largest among Asian financial institutions, and any sizable write-down could rattle already-anxious investors. Chinese stocks have fallen this year in part because of concerns that banks -- market heavyweights in China -- won't be able to sustain their strong earnings gains.
Losses are a sore point for China's big banks. In recent years they have quieted doomsayers from the 1990s who predicted that huge bad loans -- the product of decades of lending to poorly run state-owned companies -- eventually would cripple the nation's economy. Bank of China, for instance, in 1999 recorded nonperforming loans of $71 billion -- or 39% of its total loans.
Bank of China's exposure to U.S. mortgage securities became clear in late August, soon after the subprime crisis began, when the bank reported holdings of $9.65 billion in U.S. mortgage securities. But the bank also said it expected losses to be small, because it held only assets with high credit ratings. Then, in late October, it said the value of its portfolio of such securities had fallen to $7.95 billion and that it had set aside $322 million for losses in the third quarter.
Samuel Chen, banking analyst at J.P. Morgan (Asia) Securities, said he expects Bank of China to write off nearly $2 billion of its subprime holdings for all of 2007. Ms. Chu of Fitch similarly puts the figure at 20% to 30% of the total. But she said that figure could be off because analysts have ratings information only on the bank's holdings of U.S. mortgage securities through June.
A $2 billion write-down would eat into Bank of China's 2007 profit. Last year, the lender reported record net profit of almost $6 billion, and most analysts have expected that to grow to nearly $8 billion, not including losses on its mortgage securities beyond what it has reported.
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Zhou Yang in Beijing contributed to this article.
