The Wall Street Journal-20080123-Bank of China Stays Mum on Subprime Exposure
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Bank of China Stays Mum on Subprime Exposure
BEIJING -- Bank of China Ltd. expects to report an increase in net profit for 2007, but it stopped short of addressing speculation that it may have to write down a larger-than-expected chunk of the nearly $8 billion it holds in U.S. subprime-mortgage securities.
The bank, one of China's biggest state-owned lenders, said in a statement yesterday that unaudited estimates of its 2007 operations indicate that its after-tax profit for the year will "continue to record growth" from the year before, including any provisions or losses related to its subprime holdings.
Some analysts estimate that the state-owned lender may have to write off a quarter, or about $2 billion, of its holdings in securities backed by subprime mortgages, or those made to borrowers with weak credit. That would be far larger than the $322 million the lender said it had set aside for such losses when it announced third-quarter results.
Bank of China has reported the largest exposure of any Asian institution to securities backed by U.S. subprime mortgages. Bank of China's statement yesterday to the Shanghai and Hong Kong stock exchanges, where its shares are listed, specifically addressed a report published Monday in the South China Morning Post.
The Hong Kong newspaper, citing unidentified industry sources, said the bank "may post drastically lower profits, or even a loss," because of subprime problems. Bank of China's statement called the views in the article "unfounded."
The bank said it "will make appropriate disclosure in accordance with the relevant regulations if and as necessary." Analysts say it may not disclose such details until it reports full-year results, which the bank says it will do in March.
The new statement doesn't preclude a sizable write-down on Bank of China's subprime holdings. Bank of China reported 42.83 billion yuan ($5.91 billion) in net profit for 2006, and analysts estimate it earned 57.31 billion yuan in 2007, according to Thomson Financial, before accounting fully for subprime exposure. So the bank could write off nearly $2 billion of its subprime holdings -- as some analysts estimate -- and still report an increase in profit.
Other major Chinese banks have already estimated large jumps in 2007 profit. Industrial & Commercial Bank of China Ltd., the country's largest lender, estimated last week that its net profit rose more than 60%, while China Construction Bank Corp. estimated its net profit climbed 48%.
Analysts said Bank of China and other Chinese banks have been less transparent than their counterparts overseas in accounting for their subprime debt.
Yesterday, Bank of China described its statement as a "clarification," following its notice to investors in Hong Kong earlier in the day. That earlier notice said its directors were aware of recent volatility in the bank's share price, but there was no pending matter that required disclosure under listing rules.
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James T. Areddy in Shanghai contributed to this article.
