Bank of East Asia (BEA) is likely to unveil rising bad debts and little changed or lower profits when it presents its results today for last year - setting the tone for a bleak reporting season for the sector. Yesterday, analysts warned several 'swing factors' could affect BEA's final accounting for the year - including integration and restructuring charges, and the extent to which loans went bad in the second half. This is reflected in a wide range of earnings forecasts for the year - from HK$1.65 billion - an 11 per cent decline on 2000 earnings of HK$1.87 billion - to HK$2.08 billion, which would be an 11 per cent rise. At the halfway mark last year, BEA's accounts captured a cautiously optimistic view of the outlook for the remainder of the year. As with most banks, the charge it took against interim profits for bad and doubtful debts was down - in BEA's case by 77.6 per cent to HK$49.4 million - but, more importantly, were the specific provisions it made against non-performing loans. These were down from 28.4 per cent of its total bad-loan portfolio, to just 12.3 per cent. That captured a big improvement in the credit quality of its mainland business, where bad loans were down slightly less than 20 per cent - to HK$693.8 million, from HK$855 million. However, during the same period there was a 1 per cent rise in Hong Kong loans that turned bad. A similar confidence in improving credit quality saw Hang Seng reduce its specific provisioning charge - to 20.5 per cent from a previous 34.9 per cent. As a result, analysts say a key to today's BEA results - along with the results to follow - will be the degree to which the gathering economic decline in the bank's home market in the second half, together with associated rising bankruptcy levels and growing credit-card defaults, led to more loans going bad. Also crucial to the final outcome will be whether the improvement in its China loan book continued at the same pace and might, to some degree, offset declining credit qualities at home. Morgan Stanley analyst Amit Rajpal did not expect the 'chunky' write-backs in its China business in the first half of last year to have been repeated in the second half and this meant provisioning charges would go up. He expected net earnings for the year to be down by about 4 per cent - at HK$1.8 billion or HK$1.27 a share. 'Negatives for the industry generally in the second half will be a significant rise in bad debts - which will be magnified in BEA's case - along with mortgage re-pricing and a reduction in contributions by free funds because of a falling interest rate environment,' Mr Rajpal said. The bank's net interest margin was likely to decline to 2.22 per cent, from 2.47 per cent in the first half. This would represent a steeper drop than most other banks were likely to show, Mr Rajpal said. The year ahead would be little better for banks, he added, with no significant improvement in either credit quality or loan growth. 'So we are looking at a double-whammy on margins and volumes, and since bank valuations are full, we recommend under-weighting the sector,' he said. His best picks would be Hang Seng Bank and Dah Sing Bank. Lehman Brothers analyst Grant Chan said BEA's net earnings were likely to come in below his last unadjusted forecast of HK$1.9 billion, with the chief 'swing factor' being the level of provisioning made against a growing bad-debt portfolio. 'It provided next to nothing in the first half of last year and we are likely to see a return to more normalised levels,' Mr Chan said. 'Net interest income accounts for more than 70 per cent of BEA's earnings, and the key drivers - net interest margin and loan growth - have been very weak over the past six months,' he said. Core Pacific-Yamaichi banking analyst Bonnie Lai forecast a 5 per cent retreat in BEA's earnings, to HK$1.785 billion, or earnings per share of HK$1.248. 'The main reason for that is a very fast increase in operating expenses arising from the integration of First Pacific Bank and United Chinese Bank, as well as a HK$94 million goodwill charge arising from the premium paid for First Pacific,' she said. Re-pricing mortgages - which account for an industry high of 49 per cent of BEA's loan portfolio - would help squeeze the net interest margin down about 26 basis points, to 2.4 per cent, Ms Lai said.