Shares trade below IPO price on fears of more sub-prime writedowns

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(HONG KONG) Bank of China Ltd, the nation’s biggest sub-prime mortgage investor, tumbled below its initial public offer price for the first time in Hong Kong, capping a five-month slide that wiped out US$84 billion in market value.

The Beijing-based bank, China’s third largest, fell one per cent to HK$2.93 at 11.25 am in Hong Kong before recovering to close at HK$3.01, up 5 cents. Bank of China raised US$9.6 billion in a June 2006 IPO at HK$2.95 per share.

Bank of China became the second Chinese lender to fall below its IPO price, highlighting investor concern that it may have to write down more of its US$7.95 billion of subprime-related holdings. The company’s market value has almost halved since Nov 1, eliminating a combined US$10 billion of gains for cornerstone investors led by Royal Bank of Scotland plc.

‘The risk profile for Bank of China looks very different from its peers,’ said Dominic Chan, a Hong Kong-based analyst at CLSA Asia Pacific Markets Ltd. ‘The market hasn’t priced in all these additional risks.’

Royal Bank, Temasek and UBS AG injected a combined US$5 billion into Bank of China before the IPO, an investment that swelled to US$23.3 billion when the stock peaked in November. The value of their combined stakes now stands at US$13 billion, according to Bloomberg News calculations. Bank of China is still trading above the HK$1.09 Royal Bank, Temasek and UBS paid per share.

The slump came amid a rout in stock markets worldwide triggered by concerns that spillover from the US housing recession may crimp global growth. The credit-market contraction has prompted US$195 billion of writedowns and losses by banks and securities firms. The MSCI Asia-Pacific Financials Index of 248 regional finance stocks has lost 21 per cent this year.

China Citic Bank Co, the banking unit of China Citic Group, has dropped 40 per cent from its IPO price of HK$5.86 since starting trading on April 26, 2007.

No other Chinese bank has been as aggressive as Bank of China in pursuing investments in financial instruments linked to risky US home loans. ICBC and China Construction Bank, both bigger than Bank of China by assets, have announced US$1.2 billion and US$1.06 billion of sub- prime-related holdings, respectively.

Bank of China may have to write down the value of overseas securities by 35 billion yuan (S$6.8 billion), analysts at BNP Paribas SA estimated in January. That amounts to three-quarters of profit in the nine months to Sept. 30, 2007. — Bloomberg