Bank of China Ltd. discloses $10 billion in subprime holdings


By Luo Jun
Bloomberg News Service
Friday, August 24, 2007

SHANGHAI -- Bank of China Ltd. was set for its biggest drop since going public after disclosing almost $9.7 billion of securities backed by U.S. subprime loans, the most of any Asian company.

The shares fell 5.4 percent to HK$3.87 at 10:16 a.m. in Hong Kong after earlier plunging as much as 8.1 percent. Bank of China, the nation's second-largest, raised $11.2 billion in an initial public offering last June. Hong Kong-listed shares of larger rival Industrial & Commercial Bank of China Ltd. also fell.

"Bank of China disclosed numbers that no stockholders wanted to hear," Warren Blight, a Hong Kong-based analyst at Fox-Pitt Kelton (Asia) Ltd., said in a research note today. "The market is likely to be very surprised by the scale of the exposure."

Losses related to subprime loans damped enthusiasm for Bank of China even after it reported a better-than-expected 51 percent increase in first-half profit. The perceived risk of owning the company's bonds increased.

Credit-default swaps tied to Bank of China's bonds widened by about 15 basis points to 68 basis points yesterday, according to BNP Paribas SA prices. A basis point is 0.01 percentage point. Swap prices rise when investors perceive higher risk of default.

Bank of China was the biggest decliner among 41 stocks on the Hang Seng China Enterprises Index, which tracks mainland companies listed in Hong Kong. Its Shanghai-traded shares rose 1.2 percent today.

The nation's largest foreign-exchange bank set aside 1.15 billion yuan ($152 million) against possible losses on asset- backed securities and collateralized debt obligations backed by loans to borrowers with poor credit histories.

Bank of China yesterday said the provision is adequate because the bulk of its investments are rated A or higher. Chairman Xiao Gang said yesterday the bank has made "adjustments" to its subprime holdings since June.

CLSA Asia-Pacific Markets analyst Dominic Chan today cut Bank of China to "sell" from "outperform," citing its larger-than-expected holding of securities linked to subprime debt. UBS AG analyst Sally Ng cut her rating to "neutral" from "buy" and assigned the stock a short-term "sell" rating to reflect subprime concerns.

"This blows away any sensitivity analysis that we have seen," Hong Kong-based Chan said in a note to clients. "The market would raise the credibility issue about the senior BOC management."

Bank of China on Aug. 14 denied a report it may have a 3.85 billion yuan loss this year from investments backed by U.S. subprime loans, calling it "groundless and irresponsible."

Assuming that all subprime-linked securities rated below AAA would be subject to default risk, the additional loss would be 16.3 billion yuan, or 30 percent of Bank of China's expected 2007 profit, Credit Suisse Group analysts said today.

The collapse in securities backed by subprime mortgages has caused losses at lenders from Japan to Australia, helping send Asian banking stocks lower in the past month. Industrial & Commercial Bank of China, the world's largest-bank by market value, also said yesterday it had $1.2 billion of subprime-related securities.

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