BEA China disappoints in 2H with net profit of HK$6.6bn

Slowing economy and loan growth were cited.

BEA China's performance was disappointing in 2H, affected by the slowing economy with slower loan growth and rising impaired loans.

According to a research note from Barclays, China's monetary easing and the higher deposit rate cap put pressure on margin.

The report also noted that the bank's management remains cautious, guiding to single digit loan growth, margin pressure and elevated credit costs going forward and accordingly, Barclays cut its FY15-16E earnings by 8-10%.

Here's more from Barclays:

BEA FY14 results below expectations: BEA reported FY14 net profit of HK$6.6bn, +1% y/y. 2H14 profit was HK$3.2bn, -14% h/h, -5% y/y, and 5% below our estimates. Excluding investment and property valuation gains, 2H14 underlying profit was disappointing, 11% below our expectations, mainly due to a deterioration in BEA China's: 1) credit cost (up from 5bp in 1H to 91bp in 2H), 2) margin (-4bp h/h); 3) loan growth and 4) fee income. Slower revenue growth for the BEA Group was partially offset by better cost control; the cost/income ratio fell to 54% in FY14 (FY13: 56%).

Margin pressure to persist in both China and Hong Kong: Group margin declined by 4bp h/h to 1.75%. China's margin fell 4bp h/h to 2.18% after the asymmetric rate cut and increase in the deposit rate cap, which put pressure on funding costs. With further monetary easing expected this year and a shift in focus to better quality but lower yielding loans, management guides for margin pressure to remain. Management also sees margin pressure in Hong Kong from deposit competition and more lower-yielding liquid investment assets with the implementation of the liquidity coverage ratio (LCR).

Navigating through the slowdown: Loan growth slowed sharply to just 1% h/h in 2H (1H: 8%) and management guides for mid-single digit loan growth for FY15, tightening credit policy in the slowing macro environment. Loans for use in China registered no growth while other offshore loans (including Mainland corporates establishing business overseas) fell 3% h/h. Lower risk loans, such as mortgages, rose 8% h/h. We expect slower cross-border lending as the US-China interest rate differential narrows.

Asset quality deterioration: Group credit cost doubled h/h to 30bps in 2H, led by a sharp rise in BEA China's NPL ratio (1.32% in 2H up from 0.74% in 1H). One loan in the hotel industry (HK$480m) accounted for more than half of the increase in NPLs and the remainder was mainly related to the wholesale/retail trade and manufacturing sectors.