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Hong Kong company reporting season

Bank of East Asia pushes ahead with cost saving programme as pre-tax profit dips 30pc in first half

PUBLISHED : Friday, 19 August, 2016, 12:26pm
UPDATED : Friday, 19 August, 2016, 10:18pm

Bank of East Asia said on Friday that in the first half of the year it reached 23 per cent of its announced three-year cost saving target to trim HK$700 million – or 8 per cent of its 2015 costs – by the end of 2018.

The bank’s management said they will push on with the programme this year, aiming to deliver flat cost growth and improved returns to shareholders over the second half the year.

The announcement came as BEA reported a 30 per cent fall in year on year pre-tax profit for the first half of this year to HK$2.7 billion, weighed down by the double whammy of mainland Chinese interest rate cuts and economic headwinds in Hong Kong.

As both interest and fee incomes at the bank fell by double-digits, BEA’s revenues dived by 12 per cent year on year to HK$7.1 billion, below the average analyst revenue forecast of HK$8.1 billion, according to Reuters’s data.

“Given the poor macro environment, we think the result has been acceptable. Is the worst behind us? It is hard to say. But we are cautiously optimistic. Our past year’s focus has been on controlling our asset quality. We hope to deliver better results in the second half,” said Brian Li, deputy chief executive of BEA.

Managers at BEA said it will not make further forced redundancies going forward. Rather, it will aim to extract greater savings from realigning resources from non-core businesses or assets, shrinking mainland and Hong Kong branch networks, and streamlining its operational processes.

During the first half of the year the bank exited its securities businesses, Tung Shing Holdings and BEA Wealth Management Taiwan. It has also“digitised” its non-core East Asia Securities business while selling eight floors of its BEA Tower property in Beijing for a HK$396 million profit.

The bank has also initiated a process to put its holdings in Tricor Holdings up for sale; while having merged five of its mainland Chinese outlets over the first half of the year, and it will look to reduce five further sub-branches by the end of the year.

“The business and operating environment is expected to remain challenging in the second half of 2016,” said David Li Kwok-po, BEA chairman. “BEA will maintain its focus on diversifying income sources and managing operating costs. In addition, BEA will continue to focus on acquiring customers in desired and profitable segments, while maximising opportunities generated through its unique network across Hong Kong, China and overseas operations.”

Analysts said there were no real surprises in the results. “Everyone had been expecting at least a 20 per cent drop in BEA’s earnings in the first half. The bank has up to 50 per cent of its portfolio focused on China. The China business has been under pressure from mainland rate cuts which compresses the bank’s net interest margins,” said Edmond Law, Hong Kong-based research director responsible for financials at UOB Kay Hian.

Law said it wasn’t a pretty picture for BEA in its home base of Hong Kong either. “The Hong Kong loan book is basically under life support driven by local mortgage activities. The bank will have to come up with more provisions with its China’s non-performing loans - its Hong Kong bad debt figure will rise, even if it previously was starting from just a low base.”

Despite market expectations for a poor performance at BEA under current economic headwinds, the bank is currently trading at the highest valuation but lowest return-on-equity figure relative to local banking and financials peers.

BEA has been facing the greatest operational pressure of the four Hong Kong banks because of China headwinds
Elaine Zhou, Macquarie equity research analyst

BEA’s latest price-earning ratio is at 17.0x versus the industry’s median of 12.5x; its return on average equity is at 4.75 per cent versus the Hong Kong industry ROE median of 10.6 per cent. Return on equity measures a bank’s ability to deploy its capital to generate profits, with a figure above 10 per cent indicating above-cost returns whereas below 10 per cent would indicate it is doing business at below its cost of capital.

UOB’s Law says BEA’s current artificially high valuation relative to the industry is driven by “pure market speculation” that the bank will be put up for sale, a prospect encouraged by US activist hedge fund Elliott Advisors.

However, BEA chairman Li vigorously rejected the idea in an exclusive interview with the Post in May, saying his intention was to keep BEA as an independent bank rather than a part of a mainland or foreign franchise.

“BEA has been facing the greatest operational pressure of the four Hong Kong banks

because of China headwinds,” said Elaine Zhou, Hong Kong-based equity research analyst at Macquarie. “The stock price has not reflected the weak operational outlook; but rather, has been supported by ongoing M&A discussions... We believe the stock price will continue to be impacted by M&A talk.”

BEA shares closed down 2.99 per cent to HK$32.45 on Friday.