Mortgage Investing Hurts Bank of China

Bank of China Ltd. reported the slowest profit growth among China's biggest lenders in the second quarter because of subprime mortgage losses and said it holds $10.5 billion of securities backed by U.S. home loans.

Net income at China's third-largest bank rose 15%, to $3 billion, according to data released in a statement Thursday. The company said that it holds $3.64 billion of securities tied to subprime mortgages and disclosed $6.9 billion of additional home loan investments.

Overseas mortgage investments limited the bank's ability to profit from a domestic economy that grew at a 10.1% annual pace in the quarter, said chairman Xiao Gang.

Bank of China said it held $7.5 billion of debt issued by Fannie Mae and Freddie Mac as of Aug. 25 and $5.17 billion of mortgage-backed securities guaranteed by the two largest U.S. home loan providers. It held $1.83 billion of securities backed by so-called alternative-A mortgages and $5.08 billion of other "nonagency" home loan investments. About 99% of securities in the latter category are rated AAA, it said.

The company wrote down the value of subprime investments by $405 million in the quarter.

It has booked $522 million of losses to date on securities tied to Alt-A loans and another $599 million on other mortgage investments.

All told, investments in U.S. mortgage securities have caused $3 billion of losses at Bank of China since the credit crisis began a year ago, making it the biggest loser among the nation's lenders.

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