Three of Asia's biggest banks, including state-run giant Bank of China, revealed bigger-than-expected exposure to the U.S. subprime mortgage crisis, sending their shares skidding on Friday.
The news prompted fears that Asian banks, although domestically focused and risk averse after the Asia financial crisis, were not as immune as investors had hoped from the subprime meltdown.
Bank of China and its BOC Hong Kong arm reported a combined US$11.25 billion in subprime-related holdings late on Thursday, while Singapore's DBS Group acknowledged on Friday it had US$1.6 billion in holdings of collateralised debt obligations (CDOs) -- nearly double the exposure it initially declared.
"The market, including us, was surprised to see Bank of China has big exposure to U.S. subprime-related securities," said analyst Samuel Chen of JPMorgan, which cut its rating on the lender to underweight from overweight.
Bank of China shares extended opening losses and were down 6.1%, while BOC Hong Kong slid 4.2%.
UBS and Morgan Stanley cut their ratings on BOC Hong Kong, the city's No. 2 lender, citing subprime concerns.
State-run Industrial and Commercial Bank of China, the world's largest lender by market value, said it holds US$1.23 billion in mortgage-backed securities, accounting for 4.32% of its foreign exchange investment portfolio.
The Beijing-based bank said it had incurred no loss on the portfolio, which accounts for 0.0012% of its total assets.
ICBC shares fell as much as 2.4% before paring losses.
State-controlled Bank of China said late on Thursday that it held US$8.965 billion in U.S. subprime mortgage-backed bonds and US$682 million in CDOs at the end of June.
Bank of China, which posted a forecast-beating 52% rise in first-half net profit, said it had set aside provisions of 388 million yuan (US$51.3 million) and 758 million yuan, respectively, to account for potential losses.
JPMorgan's Chen said that while the bulk of Bank of China's subprime-related holdings had the highest credit rating, he expected the bank's impairment loss ratio on the holdings to increase in the second half of this year.
Some Bank of China watchers said the lender's subprime exposure was contained and manageable.
"Don't panic," Citigroup analyst Tracy Yu wrote in a research note, saying that while the size of Bank of China's exposure to subprime-related asset-backed securities (ABS) and CDOs was "sizeable", the potential loss based on provisions set aside by the bank was not significant.
Binay Chandgothia, chief investment officer for the Hong Kong operation of Principal Asset Management, which holds Bank of China shares, said the bank's subprime exposure was probably the largest among China's banks.
"It's more of a one-time event if you ask me. You look at the big banks, ICBC is a pretty small number. Bank of China is the big number," he said. "We don't think China Construction Bank (CCB) and the other banks like China Merchants have a lot of foreign assets anyway," added
Chandgothia. "With Bank of China, we were anticipating some kind of exposure which was larger than what the market was thinking."
Shares in DBS, Southeast Asia's largest bank, which confirmed the CDO exposure figure cited in a CLSA analyst report, fell 2.4% on Friday morning.
Bank of China's subprime bonds account for 3.51% of Bank of China's securities portfolio, while the CDOs account for 0.27% of the total.
Morgan Stanley and UBS on Friday downgraded BOC Hong Kong by one notch to equal-weight and neutral, respectively, saying the stock was likely to be weighed down by its subprime exposure.
BOC Hong Kong disclosed it has US$1.6 billion invested in sub-prime mortgage related asset-backed securities, Morgan Stanley said. "We expect some losses ahead," it said.