Shares of Bank of East Asia yesterday posted their biggest fall in two weeks after the city's third-largest lender reported thinning core capital and earnings that failed to meet analysts' expectations.
BEA said attributable profit rose 3.2 per cent last year to HK$4.36 billion, against average analyst target of HK$4.63 billion.
The bank's stock fell 2.78 per cent to close at HK$29.75 after the earnings announcement.
BEA said it suffered from trading losses as bond and equity markets experienced high volatility last year. It recorded a negative swing of HK$588 million on trading and investment activities, said David Li Kwok-po, the bank's chairman and chief executive.
Although deputy chief executive Brian Li Man-bun said the bank was 'comfortable' with its capital adequacy ratio, uncertainty over how it would replenish its thinning core capital, which consists mainly of equity, would undermine its share price, analysts said.
Deputy chief executive Samson Li Kai-cheong said it might consider using 'internal' channels to raise capital and sell non-core assets.
Michael Werner, a senior analyst at Sanford C. Bernstein, said he expected the bank to return to the equity markets to raise money, as its core capital ratios were the lowest among the city's listed banks.
BEA's core capital adequacy ratio shrank to 9.4 per cent from 9.8 per cent in the previous year.
The bank's high dividend payout ratio and below 10 per cent return on equity, a measure of its profitability against shareholders' capital, 'leave very little capital to support growth', Werner said.
This combination has led to the bank raising equity several times over the past five years. As a result, BEA's outstanding shares had grown nearly 30 per cent since 2003, he said.
BEA's dividend payout ratio last year reached 48 per cent. Its dividend ratio is usually between 50 per cent and 60 per cent.
'When people buy into BEA, they buy into the China growth story and a bit of Hong Kong, so it doesn't need to be paying out so high,' said Warren Blight, the head of China and Hong Kong banks research at Keefe, Bruyette & Woods Asia.
BEA benefited from its expansion strategy on the mainland, which provided higher margins in lending business. Net interest income rose 22.8 per cent to HK$9.26 billion.
The net interest margin, a measure of lending profitability, of its mainland business reached 2.46 per cent, compared with 1.75 per cent overall.
The bank plans to continue low- double-digit growth in loans on the mainland this year, after posting growth of 12 per cent last year.
Deputy chief executive Adrian Li Man-kiu did, however, say the bank took a more prudential approach to lending on the mainland in the second half of last year and shifted excess liquidity towards the interbank market. This helped lower its loan-deposit ratio to 69 per cent, against the required limit of 75 per cent.