Aug. 24 (Bloomberg) -- Bank of China Ltd. had its biggest drop since going public last year after the nation's second- biggest bank said it holds almost $9.7 billion of securities backed by U.S. subprime loans, the most of any Asian company.

The 5.4 percent decline in Hong Kong erased $10 billion of Beijing-based Bank of China's market value. Almost 1.5 billion shares were traded, more than four times the daily average over the previous six months.

``Bank of China disclosed numbers that no stockholders wanted to hear,'' Warren Blight, a Hong Kong-based analyst at Fox-Pitt Kelton (Asia) Ltd., said in a research note today. ``The market is likely to be very surprised by the scale of the exposure.''

The collapse in securities backed by subprime mortgages has caused losses at lenders around the world, helping send Asian banking stocks lower in the past month. Industrial & Commercial Bank of China Ltd., the world's largest bank by market value, said yesterday it had $1.2 billion of subprime-related securities.

Defaults on home loans to people with poor credit have prompted a sell-off of debt-backed securities that spread to wider credit markets and wiped more than $5.5 trillion off the value of equities worldwide.

Losses related to subprime loans damped enthusiasm for Bank of China even after it reported a 51 percent increase in first- half profit. The shares have fallen 10 percent in Hong Kong this year, the fourth-worst performance among companies on the benchmark Hang Seng index.

Shanghai Premium

Bank of China raised $11.2 billion in an initial public offering in June 2006.

The bank recorded the biggest drop among 41 stocks on the Hang Seng China Enterprises Index, which tracks mainland companies listed in Hong Kong. Its Shanghai-traded shares rose 1 percent today, as the CSI 300 Index had its biggest weekly gain since the benchmark was introduced in April 2005.

Bank of China sold shares in both cities in its IPO, and its Shanghai shares trade at a 64 percent premium to the Hong Kong stock.

The nation's largest foreign-exchange bank set aside 1.15 billion yuan ($152 million) against possible losses on asset- backed securities and collateralized debt obligations backed by loans to borrowers with poor credit histories.

`Don't Panic'

Bank of China yesterday said the provision is adequate because the bulk of its investments are rated A or higher. Chairman Xiao Gang said yesterday the bank has made ``adjustments'' to its subprime holdings since June.

``Don't panic,'' Citigroup Inc. analyst Tracy Yu said today in a note to clients. More than 97 percent of Bank of China's subprime portfolio is rated AA or higher, she wrote.

Banks from Germany to Japan have been touched by the subprime meltdown. Germany's government had to bail out Dusseldorf-based IKB Deutsche Industriebank AG because of potential subprime-linked losses of as much as 3.5 billion euros ($4.7 billion).

Mitsubishi UFJ Financial Group Inc., Japan's biggest bank, said this month it has about 300 billion yen ($2.6 billion) of investments that incorporate subprime loans.

Fitch Ratings today affirmed its A- ratings on Bank of China's and ICBC's long-term debt, partly because it expects the Chinese government to support the banks ``in the event of stress.'' Both companies are state-controlled.

Downgrades

CLSA Asia-Pacific Markets analyst Dominic Chan cut Bank of China to ``sell'' from ``outperform,'' citing its larger-than- expected holding of securities linked to risky debt. UBS AG analyst Sally Ng cut her rating to ``neutral'' from ``buy'' and assigned the stock a short-term ``sell'' rating to reflect subprime concerns.

The announcement of larger-than-expected subprime holdings may erode the credibility of Bank of China's management, Hong Kong-based Chan said in a note to clients.

The cost of buying default protection on Bank of China's debt fell today after surging late yesterday.

Credit-default swaps on Bank of China, which were inactively traded until yesterday, fell 16 basis points to 52 basis points at 3 p.m. in Hong Kong, according to Barclays Plc prices. A basis point is worth $1,000 on a swap that protects $10 million of debt.

``I suspect it may have been a case of buy protection first, then ask questions later,'' said Brett Williams, director of Asian fixed-income research at BNP Paribas SA. ``The market seems to be giving management the benefit of doubt, and assuming the losses will be manageable.''

To contact the reporters on this story: Luo Jun in Shanghai at jluo6@bloomberg.net

Last Updated: August 24, 2007 06:39 EDT