Not before time: just a day after news that subprime-related losses at Bank of China, the country’s biggest bank, might be more than six times larger than initially estimated, the FT reports that China’s banking regulator has convened a task force to monitor US subprime exposure at Chinese banks as they prepare for larger-than-expected losses on those holdings.
The China Banking Regulatory Commission has established a special group to investigate the subprime holdings of China’s largest lenders and report on a monthly basis.
Generally, Chinese financial institutions remain relatively unscathed compared with their counterparts in Western markets, according to the report.
But BoC, the largest holder of US subprime securities in Asia, will take losses on more of those holdings than it had earlier predicted – even though a bank spokesmen stressed it would still record annual profit growth for 2007.
At the end of September BoC set aside $321m, or just 4 per cent of its subprime portfolio, to cover any losses, and the bank has not revealed the quality of its subprime holdings. Independent estimates of its total losses vary widely but analysts have speculated this week that the bank will have to write down as much as $4.8bn, or more than 60%, of its near-$8bn in subprime securities.
The FT reports that BoC has had at least one stormy meeting with PwC, its auditor, in the past month, in which the bank’s subprime exposure was the central issue.
The two other Chinese banks with significant subprime holdings – Industrial and Commercial Bank of China and China Construction Bank – reported total exposure of $1.23bn and $1.06bn respectively late last year. Analysts say they will probably have to make provisions for 30 per cent to 40 per cent of those, a similar ratio to Citigroup.
That is comparatively small beer for the country’s largest financial institutions, and analysts say even BoC is likely to come out of the credit crisis relatively unharmed. Even if BoC had to write down its entire subprime portfolio, “it would only mean one year’s lost profit,” Bill Stacey, director of equity research at Credit Suisse in Hong Kong, told the FT.
On the upside for China’s banks, the Wall Street Journal reported on Wednesday that China’s State Council gave banks and insurers the green light to invest in each other on a trial basis, a step toward the goal of creating large financial firms that operate in a variety of sectors.
The move comes after banking and insurance regulators signed a memorandum of understanding last week to boost cross-sector co-operation.
The regulators did not say how large a stake banks and insurers could take in each other or when the trial would start. They also did not say if banks would be able to invest in all types of insurers.
But analysts noted that permitting banks to invest in insurers would allow them to rely less on lending to maintain their earnings momentum amid policy tightening by Beijing.