Unscathed Bank of East Asia to kick off earnings season
Bank of East Asia (BEA) launches the reporting season for banks in Hong Kong on Tuesday, and the city’s biggest locally-owned bank has arguably had a better year than some of its bigger peers.
Analysts say the bank is likely to report a solid profit rise of about 20 per cent, which compares favourably to the results of some big US and European names, who are still paying the price for missteps during the subprime and euro zone crises.
BEA has also avoided falling foul of regulators, and only hit the headlines recently because of renewed speculation that Guoco Group, its second largest shareholder might be planning to increase its stake.
In the past year, some of the world’s best known names have come under scrutiny over the setting of Libor, a key benchmark, with Barclays fined US$453 million in June for manipulating Libor, and UBS hit with a US$1.5 billion bill in December.
Earlier this month, RBS was fined US$612 million to settle US and UK regulatory charges of misconduct, manipulation, attempted manipulation and false reporting of yen, Swiss franc and dollar-denominated Libor.
Even HSBC Holdings and Standard Chartered had to take their medicine, although not for Libor tampering.
In December, HSBC agreed to pay US$1.92 billion to settle US probes of money laundering in the largest such accord ever, while Standard Chartered Bank agreed to pay US$327 million in fines after regulators alleged it violated US sanctions with Iran.
In contrast, BEA, controlled by the family of BEA’s chairman and chief executive, David Li Kwok-po has sailed through the past year, largely unscathed, although it did raise HK$3.3 billion in extra capital by issuing 111.6 million new shares to Sumitomo Mitsui Banking.
That issue diluted some existing shareholders’ holdings, and protected the Li family’s control of BEA, an investment banker in Hong Kong said at the time.
It also had the effect of keeping Guoco Group at arms length. Guoco is BEA’s second largest shareholder after the Li family.
Louis Tse Ming-kwong, a director of VC Brokerage, said BEA would remain on Guoco’s radar, but Guoco was “a very shrewd investor”, and would not pay too high a price for any acquisition.
“They’ve always been interested in Bank of East Asia because of its network and its potential in China,” Tse told South China Morning Post, noting that the bank’s early move into China gave it an edge.
“David Li is very, very smart. He brought the bank into China long before the others and the bank is now benefiting,” Tse said
In terms of its effect on earnings, the share issue diluted earnings by five per cent, but raised capital ratios by 75 basis points (0.75 percentage point), and probably eroded the bank’s return on equity (ROE) going forward by 40 basis points, according to Adam Chan, a banking analyst with CCB International Securities.
Steven Chan, who follows the bank for Citic Securities International, said BEA’s mainland operations have benefited from interest rate cuts in China, but its overall net interest margin (NIM) will only improve “minimally”.
Chan also expected its non-performing loans in China to rise slightly, although it would still be relatively low. Last year’s share placement should lift its core tier-one ratio to more than 10 per cent.While BEA had benefited from blazing a trail into China, “by the same token, they’ve got quite a bit of non-performing loans in China,” Tse said.
“Will they suffer like the other China banks? That’s the big question. That also determines their profit,” Tse said.
BEA’s net interest margin would remain stable at 1.63 per cent for 2012, the same as first half last year, Chan said.
Additional reporting by Sean Kennedy