Bank of China (BOC), the largest holder of the US subprime-related assets in the country, will report a "marked" net profit increase for 2007 despite the mortgage crisis influence, its chairman said yesterday.
"We have noticed the subprime crisis is worsening, but I want to say that our subprime portfolio has improved greatly," the bank's chairman Xiao Gang said at the opening ceremony of its investment management company in Beijing.
Xiao said BOC had disposed of all its subprime-related collateralized debt obligations (CDO) in the fourth quarter of 2007, and set aside sufficient reserves for other subprime-related losses.
He said that subprime mortgage securities constitute only a small part of BOC's securities investment and the bank "is selling the comparatively risky part an appropriate time.” The outstanding subprime investment of the lender by year end was scaled down further from the third quarter of last year.
According to BOC reports for the first three quarters of 2007, it held $7.45 billion worth of subprime mortgage bonds as of the end of September, accounting for 2.86 percent of its securities investments. The related CDO was worth $496 million, or 0.19 percent of the total. BOC had said last August it held $9.65 billion in US subprime mortgage securities.
However, following reports of big subprime losses at Merrill Lynch, Citigroup and UBS, BOC was predicted to lose more than 20 billion yuan ($2.79 billion) on the subprime collapse, according to the 21st Century Business Herald on Tuesday, citing unidentified analysts.
Xiao declined to release the write-down. He said that the bank will release details of its assets on March 25 when it announces annual earnings.
Despite increasing pressure from the worsening subprime crisis, Xiao remained confident about profits and development in 2008.
He said that at the beginning of this year, the one-year interest rate on some of its foreign exchange loans was 500 to 600 basis points more than London Interbank Offered Rate, and the lender expects its foreign exchange loans to be a strong driving force for its profit growth in 2008.
BOC currently holds an 83.5 percent stake in BOC Investment Management Company, while the remaining 16.5 percent stake is held by BlackRock, a major US investment management firm.
Xiao said he was optimistic about the bank's diversification, adding it was looking to set up or buy into a life insurance company, and having already entered into talks with some domestic firms on taking an equity stake.
Chinese banks received approval from the State Council to invest in insurance companies last month, after the banking and insurance regulators signed a memorandum, allowing banks and insurers to invest across the two industries on a trial basis.
BOC Insurance, a property insurance arm of BOC, recorded a premium income of 508.41 million yuan last year, compared to 121.77 million in 2006. It currently has 16 branch companies, 12 of which were established last year.