Bank of East Asia profits rise 6pc, thanks to increase in mainland lending

Bank increases net income 6pc as it steps up lending across borderdespite credit risks

PUBLISHED : Saturday, 02 August, 2014, 12:50am
UPDATED : Sunday, 03 August, 2014, 2:25pm

Bank of East Asia's net profit rose 6 per cent to HK$3.58 billion in the first six months of the year as it expanded offshore lending to mainland clients.

The bank said yesterday asset quality on the mainland would stay under pressure during the second half and it would take "proactive measures to mitigate credit risk".

First-half growth for cross-border business climbed 6.7 per cent and the bank was likely to increase exposure in the second half, according to newly appointed executive director Adrian Li.

"We have changed our focus to do more offshore financing for the mainland corporates in Hong Kong," said Li, the son of chief executive David Li Kwok-po. "We are very comfortable with this cross-border trade."

The shift to increasing exposure to mainland corporations' offshore investment could lower the risk of direct exposure to the mainland economy, where growth has been uncertain.

"That's quite reasonable because these overseas investments should be in places like Singapore or London, less risky environments," said Edmond Law, an analyst at UOB Kay Hian.

The bank also announced yesterday that David Li would stay on as chief executive for three more years. Another son, Brian Li, was also promoted to executive director.

The bank's shares yesterday closed 0.6 per cent lower at HK$32.95, while the Hang Seng Index dropped 0.91 per cent.

Impairment losses at BEA grew 73.5 per cent to HK$316 million but it said those remained at controllable levels.

The bank declared an interim dividend of 43 HK cents per share.

Net profit was slightly higher than analyst projections but a fall in net interest margin was a cause for worry, analysts said.

"The most concerning part was probably net interest income compression," said Alexander Lee, a research director at DBS Vickers.

Net interest margin, a key measure on bank profitability, fell 24 basis points at BEA China to 2.22 per cent, and 19 basis points for the group to 1.79 per cent. That could stabilise in the second half as money market rates fell on the mainland and competition for deposits in Hong Kong eased, Lee said, although it was unlikely to increase.

Net interest margin hit 1.88 per cent last year, among the fastest growing for Hong Kong banks last year, a KPMG report noted.

Exposure to the mainland, which expanded with a 25 per cent increase in advances to customers last year, helped drive the increase in net interest income, the bank said.

The bank posted record net profit for a fourth year in a row in February, taking in HK$6.6 billion last year, or year-on-year growth of 9.2 per cent, on higher interest income.

Moody's in June maintained a negative rating on the banking sector as it expected mainland exposure to continue to grow for at least the next 12 months. The International Monetary Fund voiced similar concerns earlier this year although the Hong Kong Monetary Authority has said it is monitoring the situation closely.

BEA is the largest of now just two family-owned Hong Kong financial institutions, after Oversea-Chinese Banking Corp completed its HK$38 billion takeover of Wing Hang Bank on Tuesday.

Additional reporting by Bloomberg