Eng News - Bank of China takes domestic aim after large foreign exchange losses
[size=4][color=blue]Bank of China, the country's largest foreign exchange lender, aims to strengthen its domestic operations to counter foreign exchange losses stemming from a faster appreciation of the yuan. [/color][/size][size=4][color=blue][/color][/size]
[size=4][color=blue]Chairman Xiao Gang yesterday blamed foreign exchange losses for a lower return on equity than its rivals. [/color][/size]
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[size=4][color=blue]Its 13.95 per cent return on equity - a measure of profitability - last year trailed the 14.83 per cent of Industrial and Commercial Bank of China, the country's largest lender, and the 17.62 per cent of China Construction Bank, the largest mortgage lender on the mainland. [/color][/size]
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[size=4][color=blue]"If we were to exclude the foreign exchange factor, our results were not inferior to our peers," Mr Xiao told shareholders at the annual general meeting yesterday. [/color][/size]
[size=4][color=blue]The yuan has gained almost 6 per cent this year against the US dollar after a more than 6 per cent gain last year, partly because of the dollar's weakness, the mainland's large trade surplus and capital inflows. [/color][/size]
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[size=4][color=blue]Mainland lenders usually find it difficult to hedge against currency risk because of the lack of futures for the yuan. The market for swaps and forwards also is underdeveloped. [/color][/size]
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[size=4][color=blue]Bank of China, the first mainland lender to set up a branch in the United States, suffered an exchange loss of about 1 billion yuan (HK$1.14 billion) last year. However, simple hedging through swaps and cutting foreign assets enabled it to book 700 million yuan in exchange gains in the first quarter of this year. [/color][/size]
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[size=4][color=blue]"For Bank of China, a substantial part of the earnings comes from its Hong Kong subsidiary, which would inevitably result in significant translation loss when consolidated into the parent company's balance sheet," said Bonnie Lai, an analyst at China Construction Bank (International). [/color][/size]
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[size=4][color=blue]Bank of China, which has 37 per cent of its assets in overseas markets, was also hit by the US subprime mortgage crisis and made US$1.3 billion in provisions partly for related investments last year. [/color][/size]
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[size=4][color=blue]Mr Xiao said the lender would increase efforts in developing its domestic currency business in view of the turmoil on global markets. [/color][/size]
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[size=4][color=blue]He said the global subprime crisis was not yet over despite a series of capital injections into troubled overseas financial institutions. The bank has set aside enough provisions for its subprime-related investments. [/color][/size]
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[size=4][color=blue]"We have to watch out for falling house prices in the US, which have further room to deteriorate," Mr Xiao said. "We were lagging our peers in the local market, but we will make [our business] much bigger and profitable amid the appreciating yuan and rising interest rates." [/color][/size]
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[size=4][color=blue]To bolster local business, the bank has sought to attract funds since mainland investors have begun putting money into bank deposits amid an almost 50 per cent drop in the Shanghai Composite Index this year. [/color][/size]
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[size=4][color=blue]"Growth in demand deposits has improved the bank's liquidity and contributed a lot to our earnings this year," said Zhu Min, a vice-chairman at Bank of China. [/color][/size]
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