Bank of East Asia shares rally in Hong Kong on 60pc profit rise
Profit increase thanks to better asset quality and cost efficiencies, say analysts
Shares in Bank of East Asia, one of Hong Kong’s two remaining family run lenders, rose by 3 per cent in afternoon trading in response to the strong interim earnings published by the bank at noon.
The bank posted profits from its continuing operations in the first half of HK$3.17 billion (US$405 million), up 60 per cent compared to the same period a year earlier.
The improvement was down to the bank’s ongoing cost cutting programme as well as improved asset quality, BEA’s chairman and chief executive, David Li Kwok-po said at a press conference on Friday.
“The worst is now behind BEA. Last year, asset quality was particularly weak, but it was much improved in the first half of this year,” said an equity analyst covering the bank who asked to remain anonymous.
“However, while the performance is picking up, with loan growth at the bank in just low single digits, it is hard to see where the growth will come from,” the analyst added.
Last year, impairment charges pushed BEA’s mainland China operations into a loss of HK$462 million, but in the first half of this year, BEA’s mainland operations managed a profit of HK$336 million.
“The turnaround was thanks to the improved macro economic situation on the mainland,” said Louis Tse, a director at VC brokerage.
BEA’s net profit actually grew by 241 per cent to HK$7,333, but this included proceeds from the sale of a number of the bank’s assets during the first half.
In March BEA finalised the sale of its stake in corporate services provider Tricor, which resulted in a net profit of approximately HK$3 billion for the bank, and in May it sold its rural banking subsidiary based in the central Chinese province of Shaanxi for 24 million yuan.
BEA also announced that it would issue an interim dividend of 68 Hong Kong cents a share, an increase from 28 cents for the same period last year.
The proceeds from the sale of Tricor would be partly used to contribute to the dividend, partly to support the bank’s continuing operations, and partly to invest in new projects, such as BEA’s securities joint venture in Qianhai and its micro finance company in Cambodia, said Brian Li Man-bun, one of BEA’s deputy chief executives.
BEA received permission to set up its securities joint venture in Qianhai in June.
The other major driver of the improved performance was a decline in costs. BEA is half way through a three year cost cutting programme which is aiming to achieve savings of HK$700 million.
David Li said on Friday this initiative was 67 per cent complete.
Deputy chief executive Adrian Li said that the rest of the cost savings would be more difficult to achieve as the bank had initially targeted the low hanging fruit. But he was confident of hitting the target, with many of the remainder of the savings in Hong Kong to made through branch rationalisations.
Last year the bank removed one job role in 10 through redundancies and what bank executives described at the time as “managed attrition”.
There would be no further redundancies, the bank’s directors emphasised on Friday.
As a result of the cost savings, BEA’s cost to income ratio dropped to 51.2 per cent for the first six months of this year, compared to 59.4 per cent for the same period last year.
In Hong Kong, BEA’s income from its retail banking operations rose by 17.4 per cent year on year, but income from its corporate and commercial banking operations fell.
Overall, BEA’s net interest income amounted to HK$5.73 billion in the first half, up 4.7 per cent, while non interest income was up 14.8 per cent to HK $1.89 billion.
BEA is currently locked in a legal battle with activist hedge fund Elliott Management, which is seeking to have the High Court order the removal of agreements the bank has with its two largest shareholders, Sumitomo Banking Corporation, and Criteria Caixa, a Spanish investment fund which owns Caixa bank. Last month BEA sought to have Elliott’s case “struck out” and a decision from Justice Jonathan Harris is expected in the coming weeks.
On Friday, the bank’s directors declined to comment on the hearing, saying they were still waiting to hear the decision.