Bank of East Asia

BEA hits target as net rises 20.6pc

PUBLISHED : Saturday, 16 February, 2008, 12:00am
UPDATED : Saturday, 16 February, 2008, 12:00am

Strong loan growth counters HK$1.35b subprime provisions

Bank of East Asia began the reporting season yesterday by posting 20.6 per cent growth in net profit for last year.

The result was close to the high end of market expectations even though the bank made a combined provision of HK$1.35 billion on certain securities affected by the subprime mortgage crisis in the United States.

However, some analysts were concerned that the bank might face further margin pressure this year after its net interest margin fell 12 basis points to 1.91 per cent last year.

The lender posted a net profit of HK$4.14 billion, up from HK$3.43 billion for 2006, driven by loan growth and robust mainland earnings, as well as a rise in non-interest income.

But the bank wrote down HK$1.15 billion on financial instruments, of which HK$1.09 billion was for US$700 million in collateralised debt obligations (CDOs). It also took an impairment charge on notes issued by structured investment vehicles (SIVs) of about HK$270 million, more than half of its HK$500 million total.

CDOs are pools of mortgages and corporate or commercial property loans sliced into bonds with different credit ratings and maturities. SIVs, usually set up by banks and financial institutions, raise funds through short-term commercial paper to finance long-term investments with higher yields.

The bank benefited from several exceptional gains totalling HK$1.45 billion, including the sale of securities and a subsidiary. It also recorded valuation gains on investment property. Together, these gains more than offset the substantial provisions on CDOs and SIVs.

Bank chairman David Li Kwok-po said it would be difficult to predict whether further provisions for investments would be needed this year amid the subprime turmoil.

'I think the capital markets will return to normal within two years,' Mr Li said.

Daniel Wan Yim-keung, the bank's chief financial officer, however, said the bank could write back some of the provision as early as next year when some of the CDOs matured. The bank made a substantial provision based on prudent management under the current 'unique market conditions', he said.

BOCI Research head of research Anthony Lok said: 'The bank may have to make further provisions in the first half of this year, but the amount may not be as high as last year.'

Goldman Sachs cut its ratings on Hong Kong banks yesterday.

BEA's rating was reduced to 'neutral' from 'buy'. Goldman said that BEA could face potential net interest margin pressure this year from further sharp US rate cuts, which would have a negative impact on loan and deposit spreads.

Mr Wan said the narrowing of the net interest margin last year was partly due to strong loan growth, particularly near the end of the year, but the situation could improve as more interest income would be generated from loans this year.

An analyst at a European brokerage said the bank's net interest margin might widen as the proportion of mainland business with higher net interest margins was increasing.

'I hope the [absolute amount of] profit growth this year will remain at least the same as last year,' said Mr Wan, adding that mainland operations would be a key profit driver.

Net profit from BEA's mainland operations surged 73 per cent to HK$926 million last year, or 22.35 per cent of total earnings, while mainland loans grew 72.35 per cent to HK$75.7 billion, the bank said.

The bank proposed a final dividend of HK$1.18 per share.