HONG KONG (Reuters) - Industrial & Commercial Bank of China Ltd and Bank of China posted higher fourth-quarter profits on Tuesday, buoyed by the country's surging economy, but the state lenders were dragged down by holdings in U.S. subprime-related securities.
By Kennix Chim
HONG KONG (Reuters) - Industrial & Commercial Bank of China Ltd and Bank of China posted higher fourth-quarter profits on Tuesday, buoyed by the country's surging economy, but the state lenders were dragged down by holdings in U.S. subprime-related securities.
After a bumper 2007, Chinese banks are expected to face a tougher market in 2008 as Beijing imposes curbs on lending and takes other steps aimed at heading off resurgent inflation.
Slower loan growth means borrowers in key sectors such as real estate risk defaulting as the weakening global economy take its toll, which could increase non-performing loans in 2008, analysts have said.
!ADVERTISEMENT!Bank of China, hardest-hit among the country's big banks by subprime exposure, said it held $5 billion worth of related asset-backed securities at the end of 2007, or 2.13 percent of its investment securities, and booked $1.58 billion in provisions and markdowns on the holdings.
The lender said, however, that it believed it had booked sufficient provisions and did not expect to incure further losses if it unloads its subprime-related holdings.
Both banks said they expect comparatively muted loan growth this year, while Bank of China said it plans to step up overseas acquisition activity following a year when mainland Chinese financial institutions made several landmark investments abroad.
"We're now actively considering a number of M&A opportunities that fit our overall strategy and help us become international and diversify," Bank of China said in a statement on its Web site (www.boc.cn).
Bank of China is one of three finalists bidding for Singapore state investment agency Temasek's stake in Bank Internasional Indonesia (BII), a source familiar with the situation told Reuters on Tuesday.
SUBPRIME EXPOSURE
While the subprime damage incurred by both Bank of China and ICBC was broadly within expectations, one analyst said further losses are possible for Bank of China.
"At first glance, the impairment losses that they took seem to be lower than what other banks in the region have taken," said Hong Yang-myung, credit analyst with Lehman Brothers. "It is possible they could continue to book additional losses going forward," he said.
Standard & Poor's analyst Qiang Liao said Bank of China's subprime provisioning was lower than that of global rivals because it uses a different methodology. He said the bank is under less pressure to liquidate the assets than peers elsewhere.
"If you use the mark to market method the losses would be larger," he said. "The major difference here is the bank has capacity to hold on to such assets."
Bank of China lowered its subprime-related exposure from $7.95 billion in September after shedding its collateralized debt obligations and some of its asset-backed securities.
JP Morgan expected Bank of China to book a $1 billion subprime provision for 2007 and a further $1.5 billion in 2008, while Bear Stearns had expected impairment losses totaling 21.5 billion yuan ($3.05 billion) for 2007 and 2008.
Beijing-based Bank of China, in which Royal Bank of Scotland
is a large shareholder, posted fourth-quarter profit of 10.78 billion yuan, up 3.9 percent from 10.37 billion yuan a year earlier and topping forecasts for profit of about 8 billion yuan, according to analysts polled Reuters Estimates.
Its overseas flagship, Bank of China (Hong Kong) Ltd, said it reduced its exposure to U.S. subprime asset-backed securities to HK$4.1 billion ($526 million) at the end of 2007 from HK$12.8 billion at the end of June.
BOC Hong Kong posted a 10.3 percent rise in 2007 net profit to HK$15.45 billion, topping expectations.
ICBC TOPS FORECASTS
Industrial & Commercial Bank of China (ICBC), the world's largest bank by market value, posted a 63 percent rise in fourth-quarter earnings, topping expectations, to about 18 billion yuan from 11 billion yuan a year earlier.
ICBC said it held U.S. subprime-backed securities worth $1.23 billion at the end of December 2007 and booked $400 million as an allowance for potential losses on that portfolio.
On average, 23 analysts polled by Reuters Estimates had forecast earnings of 16.99 billion yuan for the fourth quarter.
Hong Kong shares in ICBC were down 14.5 percent so far this year through last week, compared with a 24 percent drop in the benchmark Hang Seng Index.
The shares rose 8.56 percent on Tuesday before the results report, against a 6.43 percent gain in the broader index. Bank of China's Hong Kong-listed shares had lost 20 percent so far this year through last week, but rose 7.28 percent on Tuesday before the results report.
For Bank of China's 2007 earnings report, click on http://www.hkexnews.hk/listedco/listconews/sehk/20080325/LTN2008 0325204.pdf
For ICBC's 2007 earnings report, click on http://www.hkexnews.hk/listedco/listconews/sehk/20080325/LTN2008 0325182.pdf
(US$1=HK$7.8=7.0535 yuan)
(Additional reporting by Umesh Desai in Hong Kong and Kirby Chien in Beijing; Writing by Tony Munroe; Editing by Edmund Klamann and David Cowell)
