Bank of China to Take Big Hit on Subprime -Paper

By Kennix Chim and Eadie Chen

HONG KONG/BEIJING (Reuters) - Bank of China (3988.HK) might post a 2007 loss because of a big write-down on billions of dollars of U.S. subprime-related investments, a newspaper reported on Monday, sending shares in the lender tumbling.

Quoting unidentified sources, the South China Morning Post said Chinese banking regulators had warned the country's leadership that Bank of China and two other state banks would make provisions for all their assets hit by U.S. mortgage defaults.

The report heightened growing concerns about China's exposure to the subprime crisis, which has hammered earnings of major European and Wall Street banks, prompting steep share falls and capital injections to shore up balance sheets.

Analysts, however, expressed doubts Bank of China (601988.SS) would make full provisions for all its subprime-related assets in one go. The bank said its subprime-related assets were worth $7.95 billion at the end of September.

Samuel Chen, a banking analyst at JP Morgan, said write-downs would hurt fourth-quarter earnings but he still expected the bank, which earned more than $6 billion in the first nine months, to post a full-year profit.

"Given the U.S. subprime crisis is getting worse, I expect Bank of China to raise its write-off to between $800 million and $1 billion in the fourth quarter," Chen said.

"If the bank writes off more than $1 billion, there is a possibility that it will generate a fourth-quarter loss."

The other two banks mentioned in Monday's report, Industrial Commercial Bank of China (1398.HK)(601398.SS) and China Construction Bank (0939.HK) (601939.SS) have said they held $1.23 billion and $1.06 billion respectively in subprime-related investments.

Hong Kong-listed shares in Bank of China, the country's flagship foreign exchange lender, fell 5.6 percent by mid-afternoon on fears a one-off write-off would hit fourth quarter results, due to be announced in April.

The benchmark Hang Seng index .HSI was down 4.2 percent as global stock markets continued to reel from fears that the U.S. economy will slip into recession.

A bank spokesman in Beijing declined to comment.

SUBPRIME EXPOSURE WORRIES GROW

Bank of China made a net profit of 45.5 billion yuan ($6.3 billion) for the first three quarters of 2007, after booking its $322 million impairment allowance for U.S. subprime mortgage-backed bonds in its third-quarter account.

The bank surprised markets in August by announcing it held $9.65 billion of subprime-related securities and in October it booked $643 million in provisions and reserves for subprime-related investments.

It also set aside $321 million of reserves against its balance sheet to reflect depreciation in the fair value of the subprime-related securities.

BNP Paribas has lowered its 2007 and 2008 earnings estimates for Bank of China by 9 percent and 12 percent respectively to 46.9 billion yuan and 51.9 billion yuan, because of expected write-offs and falling fee income as Chinese stock markets cool.

BNP expects the bank to write off 17.5 billion yuan, or around $2.4 billion, in 2007 and the same again for 2008 because of the subprime crisis.

Chinese officials are increasingly voicing concern about the fallout of the subprime crisis, backing away from earlier confident judgments that the country was largely insulated.

The semi-official China Business News reported on Monday that a special task force comprising officials from several government agencies recently made an assessment of the potential impact of the subprime loan crisis on Chinese banks.

"The conclusion they have drawn is not very positive," the paper said, without citing specific sources.

($1=7.242 Yuan)

(Additional reporting by Alison Leung; editing by Dominic Whiting and Lincoln Feast)