Banking & Finance

Weighed down by China results, Bank of East Asia’s profit drops 19.9 per cent

Chairman rebuffs US hedge fund’s challenges as bank looks to cutting workforce to save costs

PUBLISHED : Monday, 15 February, 2016, 6:39pm
UPDATED : Monday, 15 February, 2016, 6:39pm

Hammered by the high level of bad debt in its mainland China business, profit before tax at Bank of East Asia dropped by 19.9 per cent year on year in 2015, tumbling by HK$1.2 billion to HK$6.7 billion.

The level of non-performing loans at BEA China’s business has reached 2.63 per cent. The high level of loans gone bad precipitated a 71.5 per cent drop in its mainland profit and a 106 per cent rise to bad debt charges to HK$2 billion.

Deputy chief executive Brian Li said a more stringent credit policy and an aggressive boost to its work in bad debt recovery on the mainland had enabled the bank to stanch bad debt formation there this year.

“2016 will be a difficult year. We will focus on continuing our work to control asset quality and cleaning out the house,” he said. “The transformation will take some time. As we implement quality control, loan growth will slow down but the figures will look quite ugly. We don’t believe China will experience an L-shaped economy.”

As we implement quality control, loan growth will slow down but the figures will look quite ugly
Brian Li

BEA’s stock was up 2.44 per cent to HK$23.10 on Monday despite ongoing calls from US hedge fund Elliott Management for the bank to sell off its assets or shake up its management to provide better value for shareholders – a move widely dismissed by banking analysts as a move by Elliott to create short-selling and trading opportunities.

At the briefing, BEA chairman David Li and his two sons, Brian and Adrian, rejected any move to appease Elliott out of hand, including the possibility of unloading more assets or providing the fund with a seat on the bank’s board.

“Elliott is personally challenging me. I will stand up for a good fight,” David Li said. He and his sons said the poor economic environment meant it was a particularly inappropriate time to sell. They say the restructuring moves they are making at the bank are creating long-term value for shareholders.

To arrest the deterioration led by its China lending business last year, the bank shrank its overall balance sheet by 1.8 per cent to HK$781 billion.

It also aggressively boosted its trading book, which saw assets rise to HK$5.3 billion from HK$2.9 billion in 2014. However, net trading profit was down 74 per cent to just HK$229 million.

Adrian Li, the deputy chief executive for its main Hong Kong business, said the bank would look to aggressively deploy technology and automation locally to “free up” some 30 per cent of its full time employee capacity. The bank aims to go completely paperless by 2018, allowing its front office versus back office staff ratio to reach close to one to two.

BEA’s Hong Kong business pulled in 8.5 per cent profit growth over the course of 2015, which translated into a HK$4.5 billion profit, boosting BEA’s bottom line.

David Li said the bank planned to digitise 30 branches this year. “There is no other bank as ambitious as we are out there,” he said

Meanwhile, the uncertainty in the mainland’s economic environment has allowed the bank to attract more wealth management business referred by its mainland network to BEA’s Hong Kong branches, particularly in the segment of personal clients in their 30s who are professionals.

Adrian Li said the move had allowed the contribution of wealth management business from mainland customers to rise from 33 per cent in the second half of last year to 40 per cent of its Hong Kong business at present.

He said the figure could rise to 50 per cent over the course of this year.

Brian Li said: “ This is why we always emphasise our onshore-offshore strategy – one naturally supplements the other ... I don’t think it is a fair comment on pick on our return on equity performance at this point in time. With the China exposure representing 40 per cent of our assets, when the environment turns around, we will also be one of the first banks to turn around.”

Yusuke Ochiai, chairman and chief executive of Tokai Tokyo Securities (Asia), said in Hong Kong: “I think it is quite sad. Most bank prices have come down a lot. No one talks about growth points anymore. Still I think BEA’s stock performance is quite good.”