EUR 850.00 For Business Accounts Only

Morningstar | Bank of East Asia's 2H Result Weaker as Expected; Refocused Strategy in China Shows Positive Signs

As expected, no-moat Bank of East Asia’s second-half result was weaker than the first half. Net interest income was stronger as its loan book is progressively repriced off higher interbank rates in the second half in Hong Kong, although this is offset by slightly below net fee and commission income and net trading income. The weaker net fee and commission income and net trading income against the first half was largely in line with regional and global peers. Credit cost also climbed in the second half, off an abnormally low level. This was also in line with peers in 2018 as nonperforming loans was benign. Our fair value is lowered slightly to HKD 26 from HKD 28.60 as we revise our credit cost assumption higher in the medium term and we see the bank as fairly valued.

With its three-year cost saving plan completed, the bank is refocused on growth in both Hong Kong and China. As noted previously, the bank will leverage on its own technology and also partner with Tencent’s WeBank and Ant Financial to grow its consumer lending book. Progress appears to be tracking well with 2 million retail customers added in China in 2018, though off a low base. This has translated into an increase in contribution from consumer loans to 30% of its China loan book, from 17% in 2017 and 27% in 2018. Management noted growth will be pursued more aggressively in the near term but with prudence. 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.

Economic growth in China continues to moderate while global economic conditions slowed on trade concerns. While an aggressive pursuance of growth at this point in the business cycle may be risky, we see the strategy in focusing on consumers as lower risk, relative to the bank’s prior exposure to corporate loans. Furthermore, impaired loans at the time were mainly attributable to riskier sectors in wholesale and retail trade, and hotels. We believe the quality of the China loan book is better than previous years. Management noted nonperforming loans for the consumer portfolio are below 1%. While this is expected to increase going forward, we note the denomination of an individual loan is small and tenure is short. Our forecasts have assumed higher credit cost in the medium term.