EUR 850.00 For Business Accounts Only

Morningstar | A Diverse Footprint Offers UOB Reach in Southeast Asia

We believe the Bank of East Asia will benefit from cross border trades as Chinese corporates explore growth offshore, and vice-versa for foreign companies in China. Banking operations in Hong Kong and China have become more closely connected as their economies and financial sectors gradually integrate.The bank completed a three-year cost saving plan in 2018 and we believe the bank will benefit from a lower cost base as income increases. Group cost/income ratio has declined to around 50% from mid-50% prior to the cost saving plan. While the bank reduced its bank branches in Mainland China to 100 from 129 in 2015, the closures were mainly subbranches and its footprint by cities was steady. The bank maintains one of the largest numbers of branches and outlets among foreign banks. While total branches trail larger mainland banks, Bank of East Asia is utilising technology and partnering with local platforms such as Tencent's WeBank and Ant Financial to grow its consumer loan book. We see a focus on consumer loans as lower risk, relative to the bank’s prior exposure to corporates. We remain conscious of the bank’s track record in China, which saw a sharp increase in impaired loans in 2015 and 2016 as economic growth in China slowed. In our view, the bank's China loan book should be better quality after its exposure to riskier sectors in wholesale and retail trade and hotels have been written down.In its home market in Hong Kong, a smaller deposit base compared with those of larger peers leaves the bank in a challenging position from a funding base perspective. A smaller scale is reflected in the bank's lower-than-peer return on equity. While the bank lowered its cost base as noted above, our forecast average return on equity of 7.5% remains below its cost of equity of 10%. We also noted the bank's investment record has been mixed. During the financial crisis, the bank took a HKD 3.5 billion hit by writing down its entire collateralized debt obligation portfolio in 2007 and 2008, while impaired advances peaked at 1% of total advances in fiscal 2009. Recapitalisation of its balance sheet came from dividend reinvestment plans, along with external capital.