Bank of China Cuts Subprime Exposure

Bank of China Ltd., which has been the most heavily invested in U.S. subprime securities among Asia's financial institutions, said it halved that exposure by the end of last year and posted better-than-expected profit for 2007. Separately, Industrial & Commercial Bank of China Ltd., China's biggest lender by assets, said its 2007 net profit rose 65%. Bank of China started investing in subprime assets in 2002, and by the end of 2006 it had some $10 billion of such assets in its portfolio, it said in a statement Tuesday. The bank has been paring down those investments, either by writing them off or selling them at reduced values. On Tuesday, it said it had reduced its subprime exposure to $4.99 billion -- half the portfolio's original value when the bank first made such details public in August 2007. The lender also has booked an impairment allowance of $1.3 billion to cover potential losses, it said in its statement. Analysts are likely to spend the next few days trying to figure out exactly how much the bank has lost on its subprime investments. The lender said in its statement that it "disposed" of a portion of the higher-risk U.S. subprime-asset-backed securities and all of its subprime-mortgage-related collateralized debt obligations in the fourth quarter. CDOs are among the most volatile of subprime investments, and getting rid of all of them has significantly reduced the bank's risks, analysts say. Yet it still isn't clear exactly how much the bank has lost from its subprime portfolio. Wang Zhaowen, the bank's spokesman, declined to answer any questions. International banks in general have lost between 30% and half of the value of their subprime investments. Analysts suggest that the subprime losses probably haven't pressured net earnings because of the way the bank has done the accounting. Some of the losses could have been booked to shareholder equity rather than recorded as a profit-and-loss number. If so, the government -- which owns about 70% of the bank -- would have taken the lion's share of the hit, rather than foreign and domestic investors. Such an accounting method is legal, analysts say. Meanwhile, Industrial & Commercial Bank of China said its 2007 net profit rose to 81.52 billion yuan from 49.26 billion yuan amid higher interest income and growth in its fee-based services, such as bank cards and wealth management. The bank said it booked a charge of US$400 million for its exposure to U.S. subprime-mortgage-related investments valued at US$1.226 billion. It said the provisions are enough to cover any potential losses from the investments.