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SCMP Reporter

Credit card defaults and losses on mortgage loans and property investments saw the Bank of East Asia start the bank earnings season with a bang - or rather a thud - yesterday.

Hong Kong's fourth-largest bank reported that net profit slid 19.5 per cent last year as declining property prices, near record unemployment, and a record level of personal bankruptcies forced the bank to make a HK$810 million provision for bad debt.

The bank's net profit fell to HK$1.28 billion on net interest income of HK$3.82 billion from HK$1.59 billion in profits the year before. Its bad debt provision shot up 87.6 per cent from HK$432 million in 2001.

The result came in well below expectations of the consensus estimate of HK$1.64 billion net profit from Thomson Financial.

'The sharp rise in personal bankruptcies during 2002 dented our performance,' said BEA chairman David Li Kwok-po. 'The quality of our credit card and consumer loan portfolio was affected.

'The scale of the charge against our mortgage loan business was directly related to the sharp rise in personal bankruptcies.'

The bank's massive bad-debt provision included a HK$285 million charge on property-related bad debt and a HK$355 million charge on credit card defaults, more than four times the HK$86 million the bank wrote-off in 2001.

The surge in bad credit card debt meant the bank was losing nearly a million dollars a day on its credit card portfolio - a problem it vowed to tackle.

'A million dollars a day. That's ridiculous,' said Samson Li Kai-cheong, the bank's chief investment officer. 'I expect it will get better.'

BEA's credit card charge-off ratio, or the portion of its credit card portfolio that went bad, reached a steep 19.3 per cent, well above an industry average of about 13 per cent to 14 per cent.

Alan Chua, a banking analyst at HSBC Securities said 19.3 per cent 'was quite an amazing number'.

'It punches a hole in the theory that BEA is quite conservative,' he said. 'They're losing money every day.'

The bank blamed its surge in credit card debt on its acquisition of First Pacific Bank in 2000.

'By acquiring a bank like First Pacific, you have to pay for the quality of their customers, which was not as high as ours,' David Li said, adding that First Pacific's charge-off ratio was more than 25 per cent, while BEA's was roughly 17 per cent.

The bank also made a separate HK$92 million write-down on the value of its investment properties after a revaluation and incurred a HK$31 million loss from selling off assets after shutting 29 branches following the integration of United Chinese Bank and the First Pacific merger.

BEA failed to deliver on an earlier promise that the merger would help the bank cut costs. Its cost-to-income ratio fell from 54.9 per cent to 53.4 per cent, the highest among Hong Kong banks.

Simon Ho, banking analyst at Macquarie Equities (Asia), said: 'After they closed so many branches and put so many people on the streets, costs still went up.'

BEA management highlighted the strong points of its results, including a 6.1 per cent increase in its dividend payout to 35 HK cents a share and a 28.2 per cent rise in non-interest income to HK$1.58 billion.

BEA expects record profit growth in China this year and plans to take a small stake in Resona Holdings of Japan, building on a recent alliance to do business together in China.

BEA was also optimistic about a turnaround in the operating environment this year. But analysts are more sceptical.

'Even if the economy recovers and provisions come down, it will not be a dramatic decline,' said Tracy Yiu, banking analyst at UBS Warburg. BEA might be able to cut its charge-off ratio to a still high 12 to 14 per cent, she said.

BEA's results set the stage for a dismal earnings season for Hong Kong banks.

Investors were clearly disappointed sending its shares down 4.76 per cent to HK$14 after the results were announced.

Graphic: bea12gbz



BEA's bad debts soar 87pc