Bank of East Asia yesterday launched the bank earnings season with record full-year profits of HK$4.3 billion, a rise of 60.8 per cent on 2009, and said it was confident of a strong performance this year.
BEA's result was in line with market expectations, with earnings per share rising 38.1 per cent to HK$1.92. Analysts said Hong Kong banks were generally expected to report better performances in 2010, reflecting an improved economic environment.
The third largest Hong Kong-based lender by market value said rising fee income and lower costs from bad loans helped lift 2010 profits.
'Net fee and commission income was up 30 per cent, also to a new record,' said David Li Kwok-po, BEA's chairman and chief executive.
But the bank also benefited from one-off items, including valuation gains on investment properties which rose 107.3 per cent to HK$426 million last year.
'You usually find that these valuation gains are related to a rise in economic cycles,' said Kenny Tang Sing-hing, executive director of Redford Asset Management. 'I don't think this year the valuation gain will be as substantial and that might hurt net profits.'
Bank of East Asia also sold 70 per cent of its business interest in Canada to the Industrial and Commercial Bank of China in January last year for HK$589.2 million.
But the bank said the sale of its Canadian business only contributed about 5 per cent to overall profit.
'The profit coming from our business sale in Canada is actually not that big,' said Tong Hon-shing, deputy chief executive of BEA. 'I would say we had big improvements in loan impairment losses.'
The bank's impairment losses on loans and advances shrank 74.2 per cent to HK$285 million. Analysts said the bank's cost-to-income ratio was higher than its peers and might be a red flag.
BEA's cost-to-income rose 4.5 percentage points from the second half of 2009 to 63.5 per cent in the same period last year. Hang Seng bank's cost-to-income ratio stands around 30 per cent.
'It seems that management is making no effort to lower costs as they think income will go up this year,' said Timothy Li, an analyst at Core Pacific-Yamaichi. 'This might slow down net profit growth.'
But BEA said the high costs mainly reflected expansion plans on the mainland and efforts to attract loans in China last year.
In order to meet Beijing's loan-to-deposit ratio, BEA had to cut margins to attract loans, increasing its costs, Li said, adding that he expected the bank's net interest margin to rise this year.
BEA group's net interest margin fell two basis points to 1.78 per cent in 2010. On the mainland its net interest margin was 2.29 per cent.
By the end of last year the bank's mainland division managed to lower its loan-to-deposit ratio to 78 per cent. It expects to meet China's requirement of a loan-to-deposit ratio below 75 per cent before the December 31 deadline.
'Once the bank fulfils the mainland's loan-to-deposit ratio requirement, it will have more pricing power and will be able to raise interest rates to help improve net interest margins,' said Dominic Chan, an analyst at BNP Paribas.
BEA has another deal with ICBC that is still waiting for regulatory approval from the US. The bank will sell 80 per cent of its business interest in the US to ICBC for US$140 million. The seller will retain the outstanding 20 per cent of the unit but has a put option to sell the rest at a later date.
Fewer bad loans
Bank of East Asia's impairment losses on loans and advances came to HK$285 million, down: 74.2%