BEA lowered cost income ratio to 53.2% in 1H14

The bank kept its word.

Delivering on its promise, Bank of East Asia (BEA) lowered its cost income ratio from 54.2% in 1H13 to 53.2% in 1H14, mainly related to the streamlining of its operations.

According to a research note from Maybank Kim Eng, it has thus cut its expense CAGR forecast for BEA from 9.2% to 7.4% during 2013-16.

Meanwhile, BEA's 1H14 earnings beat consensus, since net profit was HKD3.6b for 1H14, which was above Bloomberg consensus of HKD3.4b due to lower-than-expected expenses and credit costs.

Here’s more from Maybank Kim Eng:

Stable NIM & credit costs guidance. BEA group’s NIM narrowed to 1.79% in 1H14 (1.98% in 2H13).

NIM in China and HK fell 24bps and 15bps HoH in 1H14, respectively, due to higher funding costs.

With improving market liquidity, management expects NIM to remain stable in 2H14.

We lower our NIM forecast from 1.92% to 1.79% for 2014-15.

The NPL ratio in China rose to 0.74% in Jun 2014 (0.49% in Dec 2013), mainly related to manufacturing, and wholesale & retail trade loans.

As most new NPLs have high collateral coverage, credit costs in China fell to 9bps in 1H14 (15bps in 2H13).

With a prudent loan classification and provisioning policy, management expects stable credit costs in 2H14.

We conservatively project credit costs of 0.17% for BEA group in 2014 (0.15% for 1H14).

Active capital management. With the shift from direct China loans to cross-border China loans (which have cash collateral), credit risk-weighted assets grew more moderately by 1.3% HoH in 1H14.

As such, its CET1 CAR rose to 11.6% in Jun 2014 (11.4% in Dec 2013). We expect its CET1 CAR to stay above 11% during 2014-16.