BOC May Lose $537m in '06 on Rising Yuan Value

Bank of China, planning to raise as much as $8 billion in an initial public offering, may post a 4.3 billion yuan ($537 million) exchange rate loss this year due to a rising yuan, according to UBS AG, one of the sale's arrangers.

China's biggest foreign-exchange bank had a net foreign currency position of $39 billion as of Dec. 31. It made a foreign- exchange loss of 5.1 billon yuan last year due to the yuan's appreciation, according to UBS research, distributed to fund managers yesterday.

``It's no surprise that Bank of China is the most exposed to an appreciating renminbi among peer Chinese banks,'' the report said. The Beijing-based lender is unable to hedge the risks ``due to a thin forex market and regulatory restrictions.'' China's yuan currency is also known as renminbi.

The nation's second-biggest lender by assets is betting possible higher interest rates in China will improve treasury asset income, which was reduced by exchange-rate losses last year. Bank of China has the highest proportion of interest-earning assets among the nation's big four banks.

UBS expects the Chinese lender to lose another 3 billion yuan in 2007 as the Zurich-based bank forecasts the yuan to appreciate to 7.8 by end of this year and 7.5 by end of 2007 against U.S. dollar, the research said. It currently trades at around 8.014.

Hedging

By end of this year, Bank of China may be able to convert as much as $20 billion into yuan and could convert $1.5 billion per month starting 2007, according to UBS, which is arranging the share sale with BOC International (Holdings) Ltd. and Goldman Sachs Group Inc.

The Chinese lender plans to make its Hong Kong debut on June 1 and may sell a stake of between 8.14 percent and 11 percent to institutional and individual investors, people involved in the sale said last week.

The company's shares should be valued at 2.08 times to 2.4 times its 2006 book value, assuming its return on equity is in the range of 14.9 percent and 15.6 percent, according to the UBS research. China Construction Bank Corp., the nation's third- biggest lender, is trading around 2.39 times its book value and Bank of Communications, the fifth-biggest, is trading around 2.54 times, the report said.

Litmus Test

Bank of China's share sale is the second-biggest in China since Construction Bank raised $9.2 billion last year. The sale will serve as a litmus test of the government's efforts to improve the banking system.

The Beijing-based lender's profit is forecast to grow 40 percent to 36.3 billion yuan this year and may rise to 46 billion yuan in 2007 due to loan growth and net interest margin expansion, UBS's research showed.

The bank's profit may further increase to 54.6 billion yuan in 2008 as its effective tax rate will fall to 27 percent during the year from 41 percent in 2005 because of tax credits, the report said.

Bank of China is also betting ties with Royal Bank of Scotland Plc will help boost profit as the two lenders will form a credit card venture to tap rising demand for consumer banking services in China.

Royal Bank of Scotland led a group last August to buy 10 percent of Bank of China for $3.1 billion. The two banks also agreed to cooperate on wealth management, corporate banking in shipping and aircraft finance, debt capital market and general insurance, UBS said.