BANK of East Asia Ltd, the worst-performing bank stock on Hong Kong's Hang Seng Index, yesterday said it will post a HK$2.2-billion (US$284 million) loss on credit-linked investments ravaged by turmoil in global markets.
The city's third-biggest bank by assets would incur the loss, almost equal to its second-half net income last year, after selling its entire portfolio of collateralized debt obligations, it said in a stock exchange statement. The lender already wrote down the portfolio by HK$1.3 billion in the first half of this year.
Shares in Bank of East Asia, whose Chairman David Li represents the banking sector in Hong Kong's legislature, have plunged 75 percent this year as credit market turmoil soured debt investments and sapped demand for loans. They closed 16 percent lower yesterday at HK$13.38, before the statement.
"The share price will be under selling pressure because the sentiment is already so bad," Steven Leung, director of institutional sales at UOB-Kay Hian Ltd in Hong Kong, told Bloomberg News. "There will be a lot of brokers' downgrades on earnings."
Bank of East Asia survived a spate of withdrawals last month, after which the banking authorities offered a blanket guarantee on deposits in the city.
The value of CDOs, which repackage bonds, loans and credit-default swaps and use the income to pay investors, has plunged as lending froze in global markets after the collapse of Lehman Brothers Holdings Inc deepened the credit crisis.
Still, it was a good move for Bank of East Asia to sell off its CDO investments, as keeping them might lead to further writedowns, Leung said.
Bank of East Asia decided to sell off its CDOs as their value "would be further substantially eroded if held until maturity," said the statement. The sale would have a "short-term, material negative impact" on its financial results this year, it said.
Bank of East Asia's US$550-million 5.625-percent bonds maturing in 2015 traded at a record 10.3 percent yield yesterday in Hong Kong.
Standard & Poor's, which put Bank of East Asia's credit rating on negative watch after the lender cut its first-half profit by HK$109 million last month, "has no further rating action" currently, said Hong Kong analyst Terry Sham.