Chinese banks shrug off subprime, ICBC ramps up credit risk processes

ICBC and Bank of China results assuage some subprime fears

Industrial and Commercial Bank of China (ICBC) reported only minimal exposure to subprime-related bonds, Yang Kaisheng, vice-chairman and president of the bank told a press conference in Beijing and Hong Kong on March 25.

"We are holding $1.23 billion in subprime-related bonds, which amounts to just 0.1% of our assets," said Yang, adding that he was not concerned about further writedowns in the value of these assets. The bank has $505 million in collateralised debt obligations (CDOs), he said, which amounts to 0.04% of its assets.

ICBC - the world's biggest bank by market capitalisation - is based in Beijing and listed on the Shanghai and Hong Kong stock markets.

The bank had made more than full provisions for $400 million in exposure, setting aside that amount in reserves. This fully covers the bank's unrealised loss, says Yang, adding that the amount was 112% of the end-2007 value of the CDOs. The bank reported profit after tax of 82.3 billion renminbi ($11.7 billion) and had a return on average shareholders' funds of 16.2%, up from the 15.4% return recorded in 2006.

In its results statement, ICBC said it had developed its own comprehensive risk management system during the year. The bank had also launched a credit rating optimisation system for corporate clients, which is capable of determining default probability and loss ratio for individual non-retail loans, thus enhancing the accuracy of credit rating results.

"With this system, ICBC has met the requirements of the foundation internal ratings-based approach (IRB) for measuring credit risk under the Basel II accord," said chairman Jiang Jianqing. "The bank's quantitative risk assessment technology is close to the advanced international standard."

This progress is a key step for ICBC towards implementing the advanced IRB approach by the end of 2010, he added. Most Chinese banks are expected to meet the requirements between 2010 and 2012.

Meanwhile, Bank of China (BOC), reporting a rise in net profit of 31.3% to 56.2 billion renminbi for 2007, reported that it has a total portfolio of investment securities of 1.7 trillion renminbi at the end of 2007, a decline of 9.5% from end-2006.

The bank said it disposed of some of the higher-risk US subprime asset-backed securities (ABSs) and all of its US subprime CDOs at "an opportune time" in the fourth quarter of 2007. By the end of last year, the bank's investment in US subprime ABSs had been cut to $5.0 billion, accounting for 2.1% of its total investment portfolio.

BOC charged an impairment allowance of $1.3 billion for its US subprime ABSs to reflect the decrease in the fair value of its US subprime positions. The group charged $282 million to reserves at the end of 2007, say executives.

Kathleen Kearney.