Bank of China Hong Kong (Holdings) (BOCHK) reported Wednesday that its operating profit before impairment rose 20.6 percent to HK$12.76 billion for the nine months ended September 2010, compared with HK$10.58 billion for the corresponding period last year.

Operating expenses fell 25.58 percent to HK$6.88 billion in the period from HK$9.25 billion during the same period in 2009.

The report also said that BOCHK's net operating income before impairment was down nearly 1 percent to HK$19.64 billion through the first nine months of the year, compared with HK$19.83 billion through the same period last year.

The bank attributed the mild decrease in net operating income before impairment to a decline in its net trading gain. However, this was counterbalanced by an increase in net interest income as well as net fee and commission income.

Regarding the decrease in operating expenses, BOCHK said that as HK$3.24 billion of expenses relating to Lehman Brothers-related products were booked in the 2009, operating expenses in 2010 were bound to be lower on a comparative basis.

On a quarter-on-quarter (QoQ) basis, BOCHK recorded an increase in net operating income before impairment at HK$7.10 billion in the third quarter. The increase was mainly driven by the mark-to-market gain on certain interest rate instruments compared with a loss in the second quarter. In the previous quarter, BOCHK also registered a net reversal of impairment on securities investments amounting to HK$91 million.

BOCHK asserted that its loan quality remains sound and the capital adequacy ratio is solid. At the end of September, the total carrying value of BOCHK's exposure to US non-agency residential mortgage-backed securities amounted to HK$2.2 billion, representing a 26.7 percent decrease from the end of June.

Financial analysts said that though BOCHK's business performance is still constrained by the narrowing of net interest margins, the bank's future earning potential will nevertheless be boosted by several business growth prospects.

"As the local property market is unlikely to experience a severe downturn, the mortgage business of the bank should not be in trouble unless local property prices slump," said Dickie Wong, research manager at Kingston Security.

"The bank also can leverage its strengths on cross-border yuan-denominated trade settlements to enhance its earning potential. In addition, with the possibility of a mini-Qualified Foreign Institutional Investors (QFII) pilot scheme, the bank can benefit from the enlargement of investment opportunities on the mainland," Wong said.

Regarding yuan business potential, BOCHK said in the announcement that its yuan customer deposits have grown robustly. The bank will develop a wide spectrum of yuan products and services to meet the needs of customers.

China Daily

(HK Edition 10/28/2010 page2)