Proof there’s more subprimemania to come: BoC has announced it has $9.7bn of US subprime holdings.
All this on the back of earlier reports, cited by Bloomberg, that the Bank could lose $500m through its subprime exposure. The BoC told Bloomberg last week such speculation was “groundless and irresponsible”.
According to the bank’s latest disclosure, 3.8 per cent of its considerable securities investments is in subprime mortgages, through – you guessed it – ABS and CDOs.
While this hasn’t dented the Bank’s profits – up an astounding 52 per cent this H1, it’s still a pretty parlous state for a traditionally cautious bank to be in. In addition, Simon Ho, an analyst at ABN Amro, told Bloomberg that BoC could expect a more sizeable impact from the subprime exposure in H2.
Worse, BoC’s disclosure may add to speculation that the Chinese government’s subprime exposure may be larger than it has let on. Brad Setser, a senior economist at RGE monitor, told the FT last Thursday that China had about $100bn invested in mortgage-backed securities. Adding:
If you are a central bank and get caught on [something like subprime], it implied you were taking a lot of risk
On the other hand, it’s unlikely there will be any further subprime shocks on Asia’s horizon. BoC is widely thought to have the largest subprime exposure of any Chinese commercial bank, with 25 per cent of its earnings from overseas business. Industrial & Commercial Bank of China, the country’s largest bank by assets, also announced its subprime exposure today – a par value of US$1.2bn at the end of June, and certainly not enough to worry about.
BoC shares slid 10 per cent through July and August amid fears that Asian financial lenders would be hit by the subprime fallout in western markets. But shares have rallied over the past few days, closing Thursday at HK$0.55, up HK$.06.
An important test, then, will be to see what the market takes more notice of – a 52 per cent rise in quarterly profits, or a bigger than expected exposure to the subprime crisis.