Bank of East Asia (BEA), one of the largest local banks, issued a profit warning that it will post a HK$3.5-billion loss on its year-end results from its collateralized debt obligations (CDOs).

The lender said that it has disposed of its entire portfolio of CDOs before their maturity, with a further decrease in the fair value of the products as a result of the continuing turmoil in global financial markets.

Bank of East Asia executives say the lender will post a HK$3.5-billion loss this year from its collateralized debt obligations. Bloomberg

It added that losses charged to the profit and loss account in the second half of 2008 on the entire CDO portfolio amounted to HK$2.2 billion. Plus the HK$1.3 billion in investment losses for the first six months this year, it led to the lender booking a total loss of HK$3.5 billion at the end of the year.

Hit by the losses, the lender's whole-year profits will fall substantially as compared with 2007's.

"Given the worsening market conditions, the board decided to mark a line to take the (CDO) losses before they further deteriorated," BEA Chairman David Li said.

However, Li said that the CDO-related assets account for less than 1 percent of the firm's total net asset value, so he said he remains confident that the bank can record a profit in its year-end results.

Patrick Shum, chief strategist of Karl Thomson Securities, said the profit warning will not significantly drag down the lender's shares, since investors have already digested the news.

"All banking stocks fall along with the market. Issuance of a profit warning does not make much difference in this critical moment," Shum said. "In the long run, the writeoff of the toxic assets can help restore investor confidence."

Standard & Poor's, which put BEA's credit rating on "negative watch" after the lender cut its first-half profits by HK$109 million last month, said it doesn't plan to further downgrade the lender's rating.

BEA Shares plunged 16 percent yesterday to close at HK$13.38.

Other banking stocks also suffered panic selling yesterday as the stock market underwent its biggest daily drop since 1997.

(HK Edition 10/28/2008 page3)