China Bank Sets Aside (Tiny) Subprime Reserves

China Bank Sets Aside (Tiny) Subprime Reserves

February 4, 2008 0 Comments

(February 4, 2008) – China’s biggest bank, Industrial & Commercial Bank of China (ICBC), has set aside reserves equal to 30 percent of its $1.2 billion in subprime holdings to cover possible losses. ICBC has 8.6 trillion yuan ($1.2 trillion) in assets and reported 22.5 billion yuan ($3 billion) in profits for the quarter ending in September.

It is important to put this in perspective. ICBC’s subprime holdings are just 0.1% of total assets. Today’s announcement, 30% of $1.2 billion, or $400 million, is less than 2 weeks’ of ICBC’s earnings.

In January, investors sold Chinese bank shares after a news report that Bank of China, the country’s No. 2 lender, might record a loss for 2007 due to subprime problems. Bank of China said in October it held subprime debt valued at $7.95 billion. Bank of China and ICBC have China’s largest holdings of subprime mortgage debt. China Construction Bank, holds about $1 billion in subprime debt and has set aside reserves to cover a possible 40 percent loss.

I’m not saying there are no loan problems for China’s banks; just that to the extent there are problems they will be largely home-grown. Chinese banks, like other Chinese businesses, have historically faced tight restrictions on their ability to invest in foreign assets. It looks like this may be one case where tight regulation may have kept banks out of trouble. These rules are becoming less restrictive, as China’s companies make more foreign investments in line with the government’s “going out” program. Worth keeping an eye on down the road.

JR

John Rutledge

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