BOCHK reveals $69 million exposure to Lehman Brothers

Bank of China Hong Kong (BOCHK), the 60%-owned subsidiary of Beijing-based Bank of China, has direct exposure to troubled US dealer Lehman Brothers of $69.21 million in the form of Lehman corporate bonds.

This exposure comprises $50 million in senior unsecured bonds held by BOCHK and a HK$150 million ($19.23 million) senior unsecured bond held by its 51%-owned subsidiary, BOC Group Life Assurance, said BOCHK in a statement yesterday.

“The group will consider making appropriate provisions in accordance with its accounting standards on a consistent basis and will make appropriate disclosure in accordance with regulatory requirements in due course,” the bank added.

BOCHK reported its earnings for the first six months of 2008 on August 28. The bank reported operating profit before impairment allowances of HK$9.95 billion for the six months to June 30, a 15.1% increase over the same period last year. It took a total net charge of HK$2.15 billion on its securities investment portfolio, which included prime US mortgage-backed securities, as well as subprime and Alt-A securities. As a result, the bank's net profit fell by 5.1% to HK$7.09 billion for the first half of the year.

“The ongoing turbulence in the global credit markets negatively affected our securities investments … and our profit growth was impacted by a net charge of securities investment impairment allowances,” BOCHK chairman Xiao Gang told a press conference in Hong Kong on August 28. “We further reinforced our capital base and improved our capital structure with the support of our parent bank, BOC, which granted a subordinated loan of €660 million [$948 million] to the [Hong Kong] group.”

Executives said the prospect for “further provisions was always there”, and the two biggest challenges facing the bank were the deterioration in the US economy and the dramatic increase in the bank’s costs.

BOCHK is the second biggest listed company in Hong Kong, with total assets of more than HK$1 trillion at the end of 2007. The bank’s share price fell 1.76% to close at HK$14.54 a share yesterday, well off its 52-week high of HK$24.10.