EUR 850.00 For Business Accounts Only

Morningstar | Bank of East Asia Seeks Growth as the Worst of its Impaired Loans in China Are Behind it

We believe the Bank of East Asia will benefit from cross border trades as Chines corporates explore growth offshore, and vice-versa for foreign companies in China. Banking operations among Hong Kong, China, and the region have become more closely connected as their economies and financial sectors gradually integrate. Cross-border business will remain Bank of East Asia's growth driver.In recent years, Bank of East Asia has established a network of branches and offices across most provinces in China, including second- and third-tier cities. The bank has one of the largest numbers of branches and outlets among foreign banks in mainland China, but total outlets trail the mainland banks. While we expect Bank of East Asia to reap benefit from its investment as demand for offshore investments away from the mainland increases, its higher-than-peer exposure to the mainland will be a drag on profits as the Chinese economy slows in the near term. Its exposure to stressed sectors in wholesale and retail, hotels, and manufacturing resulted in a sharp increase in impaired loans. 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. Recapitalization came from dividend reinvestment plans, along with external capital. Furthermore, a smaller deposit base compared with those of larger peers in Hong Kong and China leaves the bank in a challenging position from a funding base perspective. This is reflected in the bank's lower-than-peer return on equity. However, the bank has improved operational efficiency and divested noncore businesses. We forecast the bank's cost/income ratio to steadily decline as income increases. Investment in technology should see operating expense increases at a slower pace going forward. We forecast return on equity to average 7.8% over the next five years.