Worries over Bank of China's exposure to sub-prime mortgages sent its shares sharply down overnight.
The shares plunged 7% to close at HK$3.80 in Hong Kong, while shares in its Hong Kong subsidiary, BOC Hong Kong, slid 4.7% to HK$18.64.
State-controlled Bank of China, the country's second-largest bank, said late yesterday that it held $8.965bn (£4.48bn) in US sub-prime mortgage-backed bonds and $682m in collateralised debt obligations at the end of June. It has set aside 1.15bn yuan (£75m) to cover potential losses.
The scale of the bank's exposure to the US sub-prime lending debacle wrongfooted analysts.
UBS and Morgan Stanley immediately cut their stock ratings on BOC Hong Kong, the city's second-biggest lender, citing concerns that its sub-prime exposure could hit profits. BOC Hong Kong has invested $1.6bn in securities backed by sub-prime mortgages.
Warren Blight, a Hong Kong-based analyst at Fox-Pitt Kelton, said: "Bank of China disclosed numbers that no stockholders wanted to hear. The market is likely to be very surprised by the scale of the exposure."
The news came as Bank of China posted a 52% rise in first-half net profits, ahead of forecasts. Its Hong Kong subsidiary reported a 5.3% rise in profits to HK$7.5bn.
Rival Industrial and Commercial Bank of China, the world's largest lender by market value, revealed that it holds $1.23bn in mortgage-backed securities.
Countrywide, the largest US mortgage lender, warned yesterday that the US economy was teetering on the brink of recession after a severe downturn in the housing market and a sharp slowdown in consumer spending.
Sub-prime crisis will drag America into recession, says boss of largest US lender
· Bond fund manager calls for Bush's intervention
· UK's Northern Rock raises rates for riskier loans
Friday August 24, 2007
The US economy is on the edge of recession after a severe downturn in the housing market and reports of a collapse in consumer spending, the head of the country's largest mortgage lender said yesterday.
Angelo Mozilo, chief executive of Countrywide Financial Corp, which is one of the chief victims of the sub-prime home loan debacle, said the housing crisis was the result of "one of the greatest panics I have ever seen".
When asked if housing would lead the US into a recession, he said: "I can't believe ... that this doesn't have a material effect ... on the psyches of the American people and eventually on their wallet."
His company received a welcome boost on Wednesday when Bank of America announced a $2bn (£1bn) investment.
His fears for the economy were supported by Bill Gross, who runs Pacific Investment Management Company, the world's largest bond fund. Mr Gross called on President George Bush rather than the Federal Reserve to restore US consumer confidence and avoid "destructive housing deflation".
Shares fell at Home Depot, the US DIY retailer, and other firms that depend on a strong housing market for sales growth as traders expected the lack of housing transactions to have a major impact on spending and consumer sentiment.
In the UK Northern Rock yesterday said it would be raising its interest rates for sub-prime lending by up to 1.25 percentage points, as the fallout from the sub-prime lending crisis continued to hit British banks. Sub-prime loans are available to people on low incomes and those with a poor credit record.
The Newcastle-based bank said it expected to remain competitive, but analysts said it risked losing business after raising rates by more than rival lenders. GMAC, the largest player in the market, raised its rates by 0.75 percentage points earlier this week and said it would no longer accept riskier loans.
Northern Rock insisted it had avoided debts connected to the US sub-prime crisis. The US investment bank Lehman Brothers underwrites Northern Rock's sub-prime mortgages in the UK. Lehman had been one of the most enthusiastic sub-prime lenders in the US where it faces more than 15 lawsuits for allegedly mis-selling loans. But Lehman has been forced to shut down its sub-prime mortgage unit with the loss of 1,200 jobs.
HSBC has admitted it faces $11bn of sub-prime liabilities in the US and is closing a mortgage operation in Indiana with the loss of 600 jobs.
Mr Gross, who manages the $103bn Pimco Total Return Fund, said the government should open its chequebook to bail out homeowners struggling with sub-prime mortgages.
"Fiscal, not monetary policy should be the preferred remedy. This rescue, which admittedly might bail out speculators who deserve much worse, would support millions of hard-working Americans whose recent hours have become ones of frantic desperation."
Mr Gross has a good track record of predictions on the US economy. He was one of the first investors to warn of the impending sub-prime collapse almost three years ago and in March told regulators that 17 rate rises had taken their toll on borrowers, who were defaulting on their loans in record numbers. He said there would be a domino effect on other markets.
Last month stock markets took fright as they began to calculate the effect of a housing slump with defaults on banks that bought repackaged sub-prime debts.
Mr Gross said Fed interest rate cuts would fail to ease the burden on homeowners as lenders may not follow through with cheaper rates. Lower Fed rates would also be likely to weaken the dollar and encourage further speculation, Mr Gross wrote on Pimco's website.
The Fed cut the rate it charges banks for borrowing last week providing short-term relief to the markets. Mr Gross said it would prove to be inadequate and the headline 5.25% interest rate would need to be cut.
Only a full bail out would suffice he said, for which there were several precedents. The insolvent savings and loan industry was bailed out by a government-sponsored trust fund.