Bank of China Shares Plunge on Subprime Woes

Shares in Bank of China and its subsidiary BOC Hong Kong slid on Friday amid worries that higher-than-expected exposure to sub-prime mortgages would eat into their earnings.

Bank of China shares extended opening losses and were down over 6%, while BOC Hong Kong shed 4%. The Hang Seng Index was 1% lower.

UBS and Morgan Stanley both cut their ratings on BOC Hong Kong, the city's second-biggest lender, citing concerns over its sub-prime exposure.

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 debt obligations at the end of June.

A meltdown in the U.S. subprime mortgage market has triggered a global credit squeeze and roiled markets over the past several weeks.

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 and 758 million yuan, respectively, to account for potential losses.

"The size of the subprime exposure is bigger than expected," said a banking analyst who declined to be named.

Rival Industrial and Commercial Bank of China, the world's largest lender by market value, revealed on Thursday that it holds US$1.23 billion in mortgage-backed securities, accounting for 4.32% of its foreign exchange investment portfolio.

The state-controlled bank said it had incurred no loss on the portfolio, which accounts for 0.0012% of its total assets. ICBC shares were down 2% 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 investment in sub-prime mortgages.

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.

UBS also said the bank's trading income was disappointing. It cut its price target for the bank to HK$20.80 per share from HK$21.70. BOC Hong Kong on Thursday reported a 5.3% rise in interim net profit to HK$7.47 billion.

But Steve Cheng, associate director at Shenyin Wanguo said the selling pressure on Bank of China would soon pass. "The policy favoring the bank in the individual qualified domestic institutional investor scheme will attract buyers but some people may sell off China financials because of BOC. But to see the actual impact (of its exposure), we'll have to wait," he said.

Bank of China said it would begin accepting applications from mainland individuals next week interested in investing in Hong Kong-listed securities for the first time under a government pilot program.

Its branch in the northern port city of Tianjin has been designated the initial gateway for the program, which will be expanded nationwide and is expected to prop up Chinese stocks listed in Hong Kong over the longer term.