FI/EQ- China Discovers $119 Billion Banking `Irregularities'

Check out below 2 stories.. 860 billion yuan of " irregularities " in chinese banks. This 3x the combined profits of the major banks. ( makes the US problem pale in comparision). Combined with news this am of BOC (3988) potential substantial write down on US subprime. Question is whether " China Financial System " is as robust as the current market pricing suggest.

(Adds chairman's comment in second paragraph.)

By Josephine Lau
Jan. 18 (Bloomberg) -- China discovered 860 billion yuan
($119 billion) in banking ``irregularities'' last year, almost
triple the profits by Industrial & Commercial Bank of China Ltd.
and other ``major'' Chinese commercial banks, the regulator said.
``We must strengthen our regulatory capacity and nip these
risks in the bud,'' said Liu Mingkang, chairman of the China
Banking Regulatory Commission, at the watchdog's annual planning
meeting, according to a statement posted on its Web site today.
China's ``major'' commercial banks posted combined profits of
299 billion yuan in 2007, the statement said, without providing a
year-earlier figure. A July 5 report said the banks earned an
aggregate pretax profit of 240.9 billion yuan in 2006.
ICBC, the world's biggest bank by market value, Bank of China,
China Construction Bank Corp. and Bank of Communications Co. had
average returns of 1.1 percent on their assets last year, while
their mean non-performing loan ratio stood at 2.87 percent,
according to the statement.
China's banking watchdog uncovered ``irregularities'' in its
investigation of 79,200 domestic banks, the statement said,
without defining the term.
Domestic banks had a total of $267.4 billion in overseas
assets as at the end of last year, which included their
investments and branches abroad, the Chinese regulator said.
China will draft regulations on project finance and loans for
acquisitions, fixed assets, working capital and personal use in
2008, said the watchdog.

The Bank of China (SEHK: 3988) is expected to announce a significant write-down of its failed investments in US subprime mortgage securities in the fourth quarter when it reveals its full-year results in April, mainland banking sources say.

The bank may post drastically lower profits, or even a loss, if it writes down the US$7.95 billion it holds in securities backed by loans to less-credit-worthy borrowers. In August, BOC surprised the markets by announcing it held US$9.65 billion in subprime-related securities, the most of any Asian company. In September, it revealed it had trimmed its subprime portfolio to US$7.95 billion in the third quarter and set aside US$322 million to account for potential losses.

The bank reported a net profit of 45.47 billion yuan in the first three quarters, up 40 per cent year on year.

However, the market value for subprime securities took another severe dive in the fourth quarter, forcing leading US banks, including Citigroup and Merrill Lynch, to post record losses for the period.

Banking analysts and sources said it was inevitable that BOC would greatly increase provisions for its subprime portfolio in the fourth quarter.

BNP Paribas analyst Dorris Chen said judging from the market slump in the quarter, the bank needed to set aside at least US$300 million against possible losses in the period.

But sources said senior banking regulators had already warned the mainland leadership that BOC and two other state banks - the Industrial and Commercial Bank of China (SEHK: 0349) and China Construction Bank (SEHK: 0939, announcements, news) - would have to make provisions for all of their exposed subprime-related assets.

ICBC announced in August it had subprime exposure of US$1.23 billion, for which it made a provision of 1.624 billion yuan before the end of September, while CCB had US$1.06 billion, for which a provision of 336 million yuan was made.

Although ICBC and CCB are believed to have increased write-downs for their subprime exposure in the fourth quarter, the impact on their bottom lines should be small.

Caijing Magazine reported yesterday that ICBC was expected to increase provisions to account for 30 per cent of its subprime portfolio, while CCB would increase its write-downs to 40 per cent of the portfolio in the fourth quarter.

Last week, both ICBC and CCB announced profit forecasts for the full year, expecting their profits to rise by at least 60 and 48 per cent respectively. However, the same cannot be said about BOC, which was aggressive in investing in US subprime-related securities.

Fox-Pitt Kelton analyst Warren Blight said that given losses from the US subprime market were starting to spill over to other assets, BOC would be hardest hit as it had a high concentration in foreign exchange business.

Sources said although the central government had maintained a calm stance towards the state banks' holdings of US subprime paper, the top leaders had privately expressed serious concern about the size of the holdings and had urged the banks to strengthen controls over investment in overseas financial derivatives.

Caijing yesterday quoted an unnamed banking regulator as saying one big state bank did not list overseas investments under its riskcontrol mechanism and that its chief risk officer was not aware of, and had no power over, the investments.