Compiled by Caijing staff

(Caijing.com.cn) Bank of China’s (SSE: 601988; HKSE: 3988) net profit declined 59 percent year-on-year to 4.4 billion yuan in the fourth quarter of 2008, reflecting writedowns on its overseas investments and weaker interest income as China drove interest rates sharply lower to revive its economy.

The late-year deterioration in the economy and global markets dragged down Bank of China’s 2008 profit growth to 14.4 percent under international accounting standards, well below the 31 percent rise in 2007 and 32 percent growth in the first nine months of 2008. Writedowns more than doubled during the year to 45 billion yuan from 20.3 billion a year earlier, including US$2.2 billion in provisions for overseas securities losses.

The bank did not give a quarterly breakdown of its earnings in its statement to the Hong Kong Stock Exchange. The fourth quarter result is based on calculations from the full-year net profit of 64.4 billion yuan and previously-released earnings for the first nine months of 2008.

Bank of China is the country’s largest foreign-currency lender, and its overseas focus may have made its fourth-quarter downturn more severe than any of China’s other large banks. Bank of Communications, the country’s fifth-largest bank, reported 2008 net profit growth of 40 percent last week to 28.4 billion yuan, with fourth quarter earnings down only 2 percent. The rest of China’s leading state-owned commercial banks have yet to announce results. 

Bank of China’s Hong Kong-listed unit booked a net profit of HK$3.3 billion in 2008, down 78 percent, after it made US$1.5 billion worth of provisions for its investments in US mortgage-backed securities.

Operating revenue in 2008 totaled 228.9 billion yuan, up 17.4 percent, including 51.4 billion yuan in the fourth quarter, down from 54.1 billion a year earlier as China reduced its benchmark interest rates. 

China’s central bank cut interest rates five times beginning in September 2008 to support the faltering economy, including a 108 basis point reduction in the one year-lending and deposit rates rate in late November, its single biggest rate cut since the Asian financial crisis of 1997 to 1998. 

Bank of China’s net interest income rose 6.7 percent to 162.9 billion yuan in 2008 but fell 3.5 percent in the fourth quarter to 40.7 billion yuan, while net fee and commission income totaled 39.9 billion yuan for the year, up 12.4 percent, but down 24.6 percent to 8.1 billion yuan in the fourth quarter.

As global credit markets imploded in 2008, the bank dramatically shifted its exposure to domestic securities, bringing yuan-denominated investments to 1 trillion yuan, up 66.2 billion from a year earlier. Its overall debt securities portfolio declined to 1.6 trillion yuan, down by 58.5 billion from the end of 2007.

The bank wrote down US$261 million from its portfolio of US subprime mortgage-linked investments in 2008. At the end of the year the book value of such securities was US$2.6 billion, accounting for 1.1 percent of all investment securities. It did not give year-earlier figures for its subprime portfolio. 

The book value of debt securities issued by Freddie Mac and Fannie Mae held by the bank was US$5.0 billion at the end of 2008, of which 99.2 percent was rated AAA, while value of the mortgage-backed securities guaranteed by these two agencies was US$3.7 billion. Principal and interest payments on these securities are on schedule.

The non-performing loan ratio at the end of 2008 was 2.7 percent, down from 3.1 percent at the end of 2007. Outstanding loans at the end of the year totaled 3.3 trillion yuan, up 15.6 percent from a year earlier, while outstanding deposits were up 16 percent at 5.1 trillion yuan. The bank projects new loan growth in 2009 of 19 percent. 

Bank of China’s capital adequacy ratio was 10.8 percent at the end of 2008, compared with 10.7 percent a year earlier, with core CAR at 13.4 percent, up from 13.3 percent. 

Earnings per share came in at 0.25 yuan in 2008, up from 0.22 a year earlier. 

From December 2008, two foreign strategic investors, UBS and Royal Bank of Scotland, sold their entire stakes in the bank, reflecting the need for these troubled global institutions to raise cash. Bank of China has two remaining foreign strategic investors - Fullerton Financial Holdings and the Asian Development Bank, with 4.1 percent and 0.2 percent stakes, respectively. 

The bank said it will continue to cooperate with RBS on syndicated loans and real estate financing. 

“After the stake sale by foreign strategic investors, the bank will cooperate more comprehensively with other foreign banks,” bank spokesman Wang Zhaowen said in a separate online statement. 

He noted that the bank currently has no plans to introduce any new strategic investors. 

Bloomberg News reported on March 24 that the bank received initial government approval for its 236 million euro purchase of a 20 percent stake in France’s La Compagnie Financiere Edmond De Rothschild.

In another statement, the bank said its board approved the issue of up to 100 billion yuan worth of yuan-denominated bonds in Hong Kong before the end of 2010. It gave no further details. 

Earlier this week, shareholders approved the issue of up to 120 billion yuan worth of subordinated bonds before 2012, with proceeds to supplement working capital.