INDUSTRIAL & Commercial Bank of China Ltd. (ICBC) and Bank of China posted higher fourth-quarter profits yesterday, buoyed by the country’s surging economy, but the lenders were dragged down by holdings in U.S. subprime-related securities.
After a bumper 2007, domestic banks are expected to face a tougher market in 2008 as the government 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 nonperforming loans in 2008, analysts have said.
Bank of China, hardest-hit among the country’s big banks by subprime exposure, said it held US$5 billion worth of related asset-backed securities at the end of 2007, or 2.13 percent of its investment securities, and booked US$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 incur further losses if it unloads its subprime-related holdings.
Both banks said they expected comparatively muted loan growth this year, while Bank of China said it planned to step up overseas acquisition activity following a year when mainland 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.
Bank of China was one of three finalists bidding for Singapore state investment agency Temasek’s stake in Bank Internasional Indonesia, a source familiar with the situation said yesterday.
While the subprime damage incurred by both Bank of China and ICBC was broadly within expectations, one analyst said further losses were 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 was 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 US$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 US$1 billion subprime provision for 2007 and a further US$1.5 billion in 2008, while Bear Stearns had expected impairment losses totaling 21.5 billion yuan (US$3.05 billion) for 2007 and 2008.
Bank of China posted fourth-quarter profit of 10.78 billion yuan, up 3.9 percent from 10.37 billion yuan a year earlier.
Industrial & Commercial Bank of China, 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 US$1.23 billion at the end of December 2007 and booked US$400 million as an allowance for potential losses on that portfolio. (SD-Agencies)
