By Hanny Wan
Dec. 13 (Bloomberg) -- BOC Hong Kong (Holdings) Ltd.'s first warning of an earnings drop since its 2002 initial share sale may foreshadow more profit declines by the city's banks.
BOC Hong Kong, the biggest bank by assets in the city, said yesterday parent Bank of China Ltd. will extend a $2.5 billion subordinated credit facility to strengthen the unit's capital base. BOC Hong Kong expects 2008 profit to ``decrease considerably'' as it writes down the value of its credit investment portfolio further, it said in a statement.
``It's a signal to the market that there could potentially be more local banks making further provisions for their toxic U.S. securities holdings,'' said Kenny Tang, executive director of Redford Securities Co. in Hong Kong.
The city's banks including Bank of East Asia Ltd., Hong Kong's third-biggest by assets, and Dah Sing Banking Group Ltd., have warned that the global financial crisis would damp profits. A collapse of the U.S. housing market and the lending freeze led global banks to post writedowns and losses of $987.6 billion.
``Everyone knows banks' earnings are going to look bad, but what bothers the market most is that nobody knows when all this is going to come to an end,'' Tang said.
BOC Hong Kong also said yesterday it will ``consider making provisions'' for its stake in Bank of East Asia. BOC Hong Kong, 66 percent owned by Bank of China, the nation's third-biggest by value, in June received a 660 million euro ($882 million) credit facility from its parent to be used to improve its ``capital base'' and develop its business.
Stocks Slump
More than $1.2 trillion has been wiped from Hong Kong's stock market since the beginning of this year, with the benchmark Hang Seng Index tumbling 47 percent. The city's home prices have fallen 22 percent since March, according to Centaline Property Agency Ltd. BOC Hong Kong has plunged 58 percent this year, closing at HK$9.10 yesterday.
``Bank stocks are going to be ugly on Monday. You would want to stay away from local banks,'' Tang from Redford Securities said. Mainland Chinese banks will be less affected due to support from the nation's loan growth, he said.
BOC Hong Kong booked a net impairment loss of HK$3.2 billion ($413 million) in the third quarter on U.S. credit investments, mainly related to non-agency securities backed by mortgages and senior unsecured debt issued by Lehman Brothers Holdings Inc.
The bank's investment in Hong Kong has suffered as the value of its 4.94 percent stake in Bank of East Asia has fallen. BOC Hong Kong bought the stake in November 2007 for HK$3.95 billion, or HK$51 a share. Bank of East Asia's shares have fallen 65 percent since the announcement, to close at HK$16.98 yesterday.
Bank of East Asia in October issued its first profit warning since it was incorporated in 1918, saying it would book an impairment loss of HK$3.5 billion this year after selling its entire portfolio of collateralized debt obligations.
To contact the reporter on this story: Hanny Wan in Hong Kong at hwan3@bloomberg.net
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