Bad loans in China see BEA net profit grow just 0.7pc
Bank of East Asia profit growth nearly ground to a halt last year, with bad debts on the mainland the primary damper.
The bank, Hong Kong’s largest locally owned lender, brought in HK$6.66 billion in profits, a 0.7 per cent increase on 2013 that analysts called “disappointing”, even given the mainland’s slowing economy. Profits grew by more than 9 per cent just a year earlier.
“This has been a difficult period,” William Cheng, BEA’s chief financial officer, told a press conference on Thursday, although he emphasised that the deterioration in asset quality remained manageable.
Banks are already reducing lending to China. We think that will continue this year
Bad loans on the mainland, and high impairments there, were to blame, the bank said.
The mainland’s slowdown affected BEA China’s asset quality in the second half last year, with its mainland operation’s impaired loan ratio jumping to 1.32 per cent by the end of the year, from just 0.49 per cent at the end of 2013. The bank’s overall impaired loan ratio stayed low, at 0.62 per cent
Charges for impairment losses on loans hit HK$990 million, surging 116 per cent over the HK$458 million the bank notched up in 2013.
The bulk of those impairments were concentrated on the mainland, with one 380 million yuan loan extended to a hotel constituting nearly half of the charges, BEA deputy chief executive Brian Li, the son of chairman and chief executive David Li, said, adding that the collateral on that loan was good and the bank expected to recover it this year.
Net interest margin at BEA China also suffered, falling to 2.20, from 2.22 at the end of June. BEA declared a full-year total dividend of HK$1.11 a share.
The bank was the first in Hong Kong to report full-year earnings for 2014. The results may augur poorly for banks that have ratcheted up lending on the mainland during a period of ultra-low interest rates, only to watch the economy cool and an increasing volume of debt spoil.
DBS, Singapore’s biggest bank, reported this week that provisions soared 344 per cent last year, mainly due to mainland activity, and in particular one charge on a loan to a copper smelter. DBS called it a “one-off”.
As of late last year, Bank of East Asia China had one of the highest levels of exposure of any bank to the mainland’s commercial property sector. Standard & Poor’s research said its exposure to that oversupplied segment of the real estate market was about 30 per cent of total lending, higher than even its mainland-based competitors.
Mainland-bound lending was slowing as the economy cooled, analysts said.
“Banks are already reducing lending to China. We think that will continue this year,” said Edmond Law, an analyst at UOB Kay Hian in Hong Kong, noting that a recovery of the loan to the hotel would put BEA’s results in line with expectations.
At Thursday’s press conference, BEA sought to dispel suggestions that a 222 million share private placement for nearly US$1 billion, or a 9.53 per cent stake, to Japan’s Sumitomo Mitsui Banking Corp last year abused a mandate to issue additional shares every two years. New York-based activist hedge fund Elliot Management has taken BEA to court, questioning the necessity of the placement, which will dilute the bank’s shares. Elliot holds a 2.5 per cent stake in BEA.
Brian Li said the issuance was “very fair” to existing shareholders.
