Bank of East Asia 1H14 net profit up 6% y/y at HK$3.58b

Reflecting non-interest income that exceeded expectations.

Bank of East Asia (BEA) has kicked off the HK 1H14 earnings season, with the bank having reported 1H14 net profit of HK$3,580m (+6% y/y and +9%h/h), 10%/4% above Barclays/Bloomberg consensus estimates.

According to a research note from Barclays, this has reflected higher than expected non-interest income and lower than expected operating cost.

Fee income was up 8% y/y to $2,141mn. Excluding one off items (such as valuation gains on investment properties, and disposal gain/ loss), underlying profit was HK$3,400mn, up 13% h/h.

Barclays said that the implications for other Hong Kong banks’ 1H14 results in line with BEA’s reported data are: Barclays believes NIM at smaller banks (Dah Sing) may also be under pressure in 1H14 on strong deposit competition.

In addition, NPLs may continue to crawl up for the China operations of HK banks. In contrast, we expect NIM to be largely steady for large banks with good deposit franchise, such as Hang Seng Bank, Barclays’ top pick.

Here’s more from Barclays:

NIM dropped significantly on h/h basis: Group net interest margin in 1H14 dropped by 19bps h/h (4bps y/y) to 1.79%.

BEA China margin in 1H14 was also down 24bps h/h (but up 11bps y/y) to 2.22% because of the margin benefit from the high interbank rate in 2H13 and strong deposit competition in 1H14.

NIM in Hong Kong in 1H14 down h-h due to strong deposit competition.

Management expects NIM to stabilize in 2H14 due to loan re-pricing, and less deposit competition.

In our view, China’s relaxation of LDR will improve deposit growth in China and liquidity improvement in Hong Kong will also lower funding costs.

Loan growth in 1H driven by Hong Kong and overseas: Customer loans grew by 8.3% h/h, of which Hong Kong and overseas (mainly Singapore, London and the US) were up 12.3% and 9.8% respectively.

Total deposits (including CDs) increased by 5.2% h/h with LDR of 72.1%. Average liquidity ratio was 50.2% in 1H14.

Rising NPLs but declining credit cost, which may not be sustainable: Loan provisions increased 73% y/y but dropped 8% h/h to HK$316mn.

On a group basis, credit cost was up 1bp h/h to 0.15% (1H13: 0.10%) with the NPL ratio increased 5bps h/h to 0.44% (1H13: 0.38%).

For BEA China, credit cost declined 6bps h/h to 0.09% (1H13:0.22%) with the NPL ratio up 25bps h/h/ to 0.74% (1H13: 0.43%).

Apart from rising NPLs in wholesale, retail, and manufacturing sectors, the property sector is now also under pressure on asset quality, according to the management.

In terms of geography, Zhejiang, Jiangsu, Fujian and Guangdong are the areas of concern. With an increasing trend in NPL ratio, low credit cost is not going to be sustainable, in our view.

Continuing efforts in cost control: Cost income ratio was down to 53.2% in 1H14 from 54.2% in 1H13. Excluding the business tax and surcharges in China, cost income ratio was 49.4% in 1H14 (1H13: 50.4%).

BEA’s cost income ratio is still the highest among its local peers. Management will continue its cost control strategies and targets to deliver positive operating jaws.

Appointment of Executive Director: Mr. Adrian Li and Mr. Brian Li (sons of Mr David Li, Chairman and Chief Executive of BEA) were appointed as Executive Directors of BEA effective from 2 August 2014.

They are currently Deputy Chief Executive of BEA. Also, the appointment of Dr David Li as the Chief Executive of BEA has been extended to the end of March 2018.