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Bank of China Shares Fall in Hong Kong on Subprime (Update2)

By Luo Jun
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Aug. 24 (Bloomberg) -- Bank of China Ltd., the nation's second-largest, headed for its biggest drop since going public last year after disclosing almost $9.7 billion of securities backed by U.S. subprime loans, the most of any Asian company.

The shares fell 5.6 percent to HK$3.86 at 11:10 a.m. in Hong Kong after earlier plunging as much as 8.1 percent. Bank of China raised $11.2 billion in an initial public offering in June 2006. 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.''

The collapse in securities backed by subprime mortgages has caused losses at lenders around the world, 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.

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. Bank of China shares have fallen 9.8 percent in Hong Kong this year, the fourth-worst performance among companies on the benchmark Hang Seng index.

`Don't Panic'

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 2 percent today, as the CSI 300 Index headed for its biggest weekly gain since the benchmark was introduced in April 2005.

Bank of China sold shares in both cities in its IPO, and its Shanghai shares trade at a 67 percent premium to the Hong Kong stock.

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.

``Don't panic,'' Citigroup Inc. analyst Tracy Yu said today in a note to clients. More than 97 percent of Bank of China's subprime portfolio is rated AA or higher, she wrote.

Downgrades

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 creditability 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.

Default Protection

The cost of buying default protection on Bank of China's debt fell today after surging late yesterday.

Credit-default swaps on Bank of China, which were inactively traded until yesterday, fell 10 basis points to 58 basis points at 10.00 a.m. in Hong Kong, according to Barclays Plc prices. A basis point is worth $1,000 on a swap that protects $10 million of debt.

``I suspect it may have been a case of buy protection first, then ask questions later,'' said Brett Williams, Hong Kong-based director of Asian fixed-income research at BNP Paribas SA. ``The market seems to be giving management the benefit of doubt, and assuming the losses will be manageable.''

To contact the reporters on this story: Luo Jun in Shanghai at jluo6@bloomberg.net
Last Updated: August 23, 2007 23:37 EDT