BEA's China unit likely to stand out as growth driver

Bank of East Asia, the largest family-controlled bank in the city, kicks off earnings season for Hong Kong banks tomorrow, with exposure to the mainland and worsening credit quality from an economic slowdown in the country among key considerations for the sector.

The market consensus is for BEA to post a net profit of HK$5.9 billion last year, down 2.3 per cent from 2012. Its growth driver is mainland subsidiary BEA China, which contributed a third of the group's pre-tax profit in 2012, and is tipped to enjoy better interest margins than its peers last year.

Analysts said a worsening of credit quality in China stemming from weaker economic growth caused BEA net profits to slip.

"An increase in loan provisions may [have] eroded the gains in interest margins and affected revenue growth," DBS Vickers analyst Alexander Lee said, adding that property revaluation gains may not be as significant as in the first half of the year.

Some analysts feel BEA may provide a surprise after a surge in the Shanghai interbank offered rate, or Shibor, handed robust interest income to net lenders. In the second half, the Shibor jumped as mainland banks faced a credit squeeze in the banking system.

"The margins of China operations will likely improve in the second half, helped by loan repricing and lower funding costs," Grace Wu, an analyst at Daiwa Capital Markets, said. The increase in short-term Shibor and yuan bond yields in the second half would help BEA China's net interest margins and should translate into gains for the group, said Maybank Kim Eng analyst Steven Chan.