Securities houses yesterday downgraded the investment ratings of Bank of China (Hong Kong) (BOCHK) after the lender issued a profi t warning on Friday. Analysts are also skeptical about the bank's stock after the capital infusion by its parent.

Shares in BOCHK plummeted as much as 6.48 percent or HK$0.59 before paring some losses to close 4.73 percent lower at HK$8.67. The lender said in a statement on Friday that it expects 2008 profits to "decrease considerably" due to writedowns on credit investment, and its parent, Bank of China (BOC), has agreed a $2.5-billion capital injection boosting its capital.

The size of the fundraising is almost four times the $690 million of creditlinked investment losses BOCHK has recorded this year, fueling concern that the bank may announce additional charges.

BOCHK's CAR (Capital Adequacy Ratio) was extremely healthy at 14 percent, which means that there was no apparent need for capital, Morgan Stanley's analysts pointed out in a research note yesterday. They wondered why the bank needs to raise such an amount of capital, although Morgan Stanley has estimated about HK$1 billion loss for the bank in the second half of 2008.

Morgan Stanley downgraded the stock's rating to "underweight" from "equal-weight", and "potentially, losses in investment book are much higher than our revised expectations."

The firm expects no dividend in second half. Even in 2009, "we expect the earnings to be weak, roughly 40 percent lower than 2007's levels," the analysts said.

The stock performance of BOCHK is expected to be weak in 2009. Morgan Stanley set a price target for the lender at HK$7.

Merrill Lynch also cut its investment rating on BOCHK to "neutral" from "buy" based on the bank's cont inued poor earnings visibility.

The firm was concerned over the potential impact to BOCHK's earnings from its investment in US asset-backed securities, and it noted that the $2.5 billion subordinated loan facility fi nally tipped the scales against the bank's stock.

"We contend that uncertainties over the potential impairment will weigh on the share price in the near term," Merrill Lynch's analysts wrote.

The firm has cut its 2008 full-year earning forecast for the lender by 75 percent to HK$2.4 billion, which implies the bank will report a loss of HK$4.7 billion in the second half.

It is expected that the lender will write off a HK$2.7 billion for its stake investment in Bank of East Asia, and an additional HK$4 billion impairment provision against the bank's US asset-backed securities.

Merrill Lynch doesn't expect the lender to pay a cash dividend in second half of 2008, and it has lowered the price objective for the stock to HK$12.5 per share.

(HK Edition 12/16/2008 page3)