Bank of China May Absorb Part of $1 Billion in Client Losses

(Bloomberg) --

Bank of China Ltd., facing a public outcry and regulatory scrutiny over the collapse of an investment product linked to oil futures, may shoulder part of $1 billion in losses suffered by its retail clients, according to people familiar with the matter.

China’s fourth-largest bank by market value is talking to regulators about not seeking recourse on losses in excess of investors’ margins, said the people, who asked not to be identified discussing a private matter. Regulators are leaning toward having the bank take some losses, they said. The plan isn’t final and subject to change.

Thousand of retail investors across China are facing combined losses topping 7 billion yuan ($1 billion) after the bank’s “Crude Oil Treasure” product was settled at prices far below zero, mirroring the collapse in West Texas Intermediate crude on April 20 to minus $37.63 a barrel. Hundreds have taken to the internet to protest the lender’s handling of the contract rollover and to demand it assume some of the shortfall.

Investors who don’t make good on losses that exceed their total investment shouldn’t have that reflected in the nation’s credit scoring system, the people said.

The central bank and the banking regulator didn’t immediately reply to requests seeking comments.

Reasonable Complaints

Bank of China said in a statement late Wednesday that it is “actively” working on a solution to address clients’ “reasonable” complaints and demands, and will try its best to protect their rights and take social responsibility. Meanwhile, the lender has sent CME Group Inc. an official request, urging the exchange to investigate reasons behind “abnormal” price volatility in crude futures seen on April 21, according to the statement.

Jefferies Financial Group Inc. estimated that the bank’s losses could end up being 4 billion to 10 billion yuan, when also taking into account potential legal costs. That represents about 1.6% to 4% of the bank’s pretax profit, analyst Chen Shujin wrote in a note on Tuesday.

The turmoil is drawing further attention to China’s $3 trillion industry for bank wealth products, which invest in everything from bonds and stocks to foreign exchange and commodities. They have become key building blocks of a shadow-banking system that exists largely off banks’ balance sheets.

The partial bailout also underscores the challenge to regulators, who have been trying to do away with the implicit guarantees often offered by banks and to instill more risk awareness among millions of retail investors. When wealth products struggle to meet their return targets in China, lenders that distribute them often make up the shortfall to protect their reputation and maintain social stability.

Bank of China hasn’t disclosed the size or performance of “Crude Oil Treasure” since launching the product in January 2018.

The investment vehicle had offered Chinese retail investors access to WTI oil futures without opening an offshore account and was pegged to the flat price of the front-month contract and settled in Chinese yuan. It required 100% margin and didn’t allow any leverage. The unprecedented price slump below zero, however, wiped out many investors’ margins and left them with further debt owed to the bank.

The implosion has also forced other banks to suspend sales of similar products that allowed investors to speculate on swings in commodities.

Industrial & Commercial Bank of China Ltd. temporarily halted opening of new positions in products linked not only to oil, but also to natural gas, and soybeans from April 28. China Construction Bank Corp. and Bank of Communications Co. are among lenders that have also suspended opening of new positions on their WTI-linked products for individuals.

The oil price shock hammered retail investors beyond China. In South Korea, mom-and-pop investors exposed to about 1.45 trillion won ($1.2 billion) worth of structured notes tied to Brent or WTI futures faced losses. In India at least three brokerages have petitioned the courts to challenge the settlement of contracts after their clients faced millions of dollars in losses from the negative prices.

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With assistance from Bloomberg