Stock boom vs subprime: '07 sees rollercoaster ride
By Karen Cho (HK Edition)
Updated: 2008-04-15 07:28

Hong Kong banking sector went on a rollercoaster ride in 2007 as crisis in the credit markets cast a pall of gloom on their profit books.

Feverish stock market in the first half of 2007 sent banks' profits to dizzying heights before the implosion of the subprime industry in the middle of the year zapped the optimism out of the financial world in a surprised attack.

Complex investment tools, such as collateralized debt obligations (CDOs) and structured investment vehicles (SIVs), which were practically unheard of by the public before the onset of the turmoil, began to creep up everywhere sucking up money along the way.

Petrified bankers found gaping holes appearing on their profit books, with the value of the investments diving at an alarming speed as tentacles of the subprime crisis gripped the global financial market.

"Looking back, those were definitely bad investment decisions," China Everbright banking analyst Tony Tong said. Banks watched impairment losses piling up as they rush to patch up their profit books by writing off bad debts.

"There is not much banks can do but to make provisions," Tong said, "which is what they did."

Exposed directly to the US subprime industry, global banking giant HSBC had to write down a staggering $17.2 billion in losses. Although HSBC still managed to increase its profit by 21 percent, the impairment it shouldered amounted to 90 percent of its $19.1 billion net profits in 2007.

Bank of China (BOC), one of the biggest holders of US mortgage-backed securities, also put $1.3 billion aside, in anticipation of huge losses brought on by the credit market stranglehold.

Standard Chartered Bank (SCB) sustained a $300 million loss to CDOs and SIVs in 2007. The failed rescue operation of the bank's troubled SIV portfolio, named Whistlejacket, cost the bank a total of $116 million alone.

However, the robust economic conditions in the first half of 2007 provided the banks with a comfortable profit cushion, preventing them from plunging into the financial red. BOC was able to increase its net profits by 33.3 percent to $7.99 billion, while SCB recorded a 25 percent gain to bring in $2.81 billion.

Smaller local lenders with relatively little exposure to the US also were not immune to the subprime-triggered credit market doldrums. Bank of East Asia wrote off HK$1.4 billion in CDO and SIV related losses, while Chong Hing Bank bore a HK$370 million impairment loss.

Wing Lung Bank, Dah Sing Bank and CITIC Ka Wah Bank, however, were the biggest casualties of the credit market maelstrom.

All three banks saw their net profits dive last year, despite robust earnings from the stock market in the first half. CITIC Ka Wah was the hardest hit, with its 2007 net profits tumbling 88 percent over 2006.

Wing Lung Bank and Dah Sing Bank also saw their net profits plummet 14.6 percent and 33 percent respectively, as SIVs devoured their profits.

Jay Luong, vice-president of banking research for Credit Suisse is not surprised that these smaller banks with less capital were hardest hit. "The smaller guys are typically less sophisticated than the large institutions and might not know what they were buying into," Luong said.

The only local bank that managed to avert the subprime quagmire is Hang Seng Bank, which had no CDOs or SIVs in their portfolio. The absence of impairment loss meant that the lender can take full advantage of the rosy stock market in the first half, to bring in a total of HK$1.8 billion in net profits - a 51.50 percent increase over last year.

(HK Edition 04/15/2008 page2)