How Bank of China Will Lose Billions
An article in today’s Wall Street Journal states that Bank of China reported a 23% increase in profit year over year for the third quarter. If you find such numbers mind-numbing (because you are not invested in any Chinese banks) like me, don’t worry – you might be more interested to know that they have quite possibly overstated their gains. Why? Let’s took a look at the official numbers from the article first:
Bank of China, one of China’s four biggest lenders by assets, said it charged an additional impairment allowance of $322 million against its exposure to subprime asset-backed securities and collateralized debt obligations during the third quarter. The total amount of subprime allowances was $473 million at the end of September, it said.
The lender said the carrying value of investments in subprime asset-backed securities was $7.5 billion, or 2.9% of its total investment securities, while those in CDOs was $496 million, or 0.2% of its total investment securities.
Bank of China’s net profit rose to 15.9 billion yuan ($2.13 billion) from 13 billion yuan a year earlier. Net-interest income rose to 39.5 billion yuan from 32.5 billion yuan, while net fee and commission income more than doubled to 7.2 billion yuan.
So How Much More Could Bank of China Lose?
A write down of almost 6% on subprime backed assets is probably just a teeny bit of an understatement. And though they have not disclosed holdings of Alt-A mortgage backed securities (Alt-A were very risky loans given to people with high credit scores), it is likely that they have an equal amount of them since the total numbers of Alt-A mortgages are about equal to suprime. So we’re talking somewhere around $16 billion in subprime and Alt-A mortgage backed securities and CDOs on the books at Bank of China. Apply what you believe these will lose on average (a percentage), and you’ve got what should be their real write-down.
Think it’s limited to $473 million?
