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Bank of China Q2 profit up but subprime losses bite

HONG KONG - Bank of China 3988.HK, the country's flagship foreign exchange lender, posted a forecast-beating 15 percent rise in second-quarter profit, as rising fee income helped offset its exposure to U.S. subprime-related holdings.

Bank of China's first-half earnings growth was the weakest among its peers due to its heavy overseas exposure as U.S. interest rate cuts compressed its foreign currency lending spreads. Other Chinese banks have feasted on growing interest margins, although domestic margins are expected to narrow in the second half.

"We have more than 30 percent of foreign currency assets, far higher than the industry's average of 8 percent in China," the bank said in a statement, noting that yuan currency appreciation and interest rate cuts in Hong Kong and the United States made it hard to prevent its foreign currency assets from losing value.

Bank of China, the hardest-hit among big Chinese banks by its exposure to the U.S. subprime mortgage meltdown, said it held $5.47 billion worth of U.S. subprime-related securities at the end of June, and booked an impairment allowance of $2.4 billion for those securities for the first half.

It also held $10.6 billion of debt securities issued by troubled U.S. mortgage firms Freddie Mac FRE.N and Fannie Mae FNM.N but reduced these holdings to $7.5 billion as of Aug 25.

Citigroup expected Bank of China to book a second-quarter provision for its subprime mortgage and Alt-A mortgage backed securities (MBS) of 6.2 billion yuan ($908 million) after taking markdowns of $2 billion in the first quarter as the U.S. housing crisis roiled global credit markets.

The Beijing-based lender, in which Royal Bank of Scotland RBS.L has a nearly 4.5 percent stake, earned an April-June net profit of 20.5 billion yuan, compared with 17.8 billion yuan a year ago, beating five analysts' average forecast for 19.1 billion yuan based on Reuters calculations.

In the first half of this year, Bank of China reported 42.2 billion yuan net profit, up 43 percent from 29.5 billion yuan a year earlier and ahead of the 40.8 billion yuan forecast by analysts.

"Chinese banks' first-half results are outperforming other Chinese companies. Even though the lenders' second-half results cannot match the high growth of the first half, the fundamentals are still strong compared with other sectors," said Lawrence Lo, vice president at Lombard Odieer Darier Hentsch (Asia) Ltd.

Separately, its Hong Kong-based overseas flagship, Bank of China (Hong Kong) Ltd 2388.HK, posted a 5.1 percent fall in first-half profit to HK$7.1 billion ($910 million) and booked a net charge of HK$2.1 billion in impairment allowances for its U.S. asset-backed securities.

For a factbox on foreign bank investments in Chinese lenders, click [ID:nHKG15200]

Bank of China's net interest income derived from lending operations jumped 14.8 percent to 81.5 billion yuan in the first half of 2008. Net fee and commission income rose 45 percent to 22.4 billion yuan.

Net interest margins widened to 2.72 percent in the first half compared with 2.66 percent a year earlier.

Bank of China's Hong Kong-listed shares have lost 12 percent so far this year, compared with a 25 percent slide in the benchmark Hang Seng Index .HSI. Its Chinese domestic A-shares were down 45 percent during the same period of time.