Investment suggestion
The company announced 1H21 results: revenue of HK $8.415 billion, down 0.7% from the same period last year, down 4.8% from the previous month; net profit of HK $2.671 billion, corresponding to HK $0.78 per share, up 74.3% from the same period last year, up 28.3% from the previous month, slightly higher than we expected. We believe that the improvement in the quality of the company's assets and the significant reduction in credit impairment have driven the growth. Upgrade the company to neutral rating and maintain the company's target price of HK $16.50. The reasons are as follows: the net interest margin remained stable month-on-month, and non-interest income performed well. 1H21's net interest income was 5.523 billion Hong Kong dollars, down 9.7% from the same period last year. Affected by the low-interest environment, the company's net interest income continued to be under pressure, but the overall net interest margin 1H21 increased to 1.38% month-on-month. Management said that the main reason for the interest margin to remain stable is to actively control the cost of debt: 1) further increase in demand and savings deposits, the CASA ratio increased to 44.1% 6 2) the proportion of deposits of affluent and mass affluent customers has increased, which can effectively reduce the cost of debt. 1H21's non-interest income increased by 22.5% compared with the same period last year, including rapid growth in investment product sales, insurance sales and securities brokerage revenue, while credit card and trade financing income declined. In addition, premium income and transactional income contributed HK $103 million and HK $386 million to non-interest income.
Chinese mainland loans to the public increased rapidly. 1H21 Chinese mainland loans increased by 17.59% over the same period last year, of which public loans increased by 25.2%, while retail loans fell by 0.2%. Management said the hindrance to Chinese mainland's retail loans was mainly due to restrictions on mortgage loans and tighter Internet lending policies. At present, in the company's Chinese mainland loan structure, the public accounts for 74%, and retail accounts for 26%. The management expects that the growth of 2H21 loans to the public will maintain the momentum, and the group as a whole will achieve medium-and high-single-digit growth for the whole year.
The defective rate decreased by 5bp to 1.21% compared with the same period last year, and the cost of credit decreased significantly. The credit cost of 1H21 company is 0.22%, which is 84bp lower than that of 2H20. The loss of credit impairment is HK $581 million, which is HK $2.094 billion less than that of 1H20. The improvement in credit cost is mainly due to the reduction of corporate loan downgrades and the updating of economic variables in the expected credit loss model, reflecting the sustained recovery of the global and regional economy. The defect rate of Chinese mainland dropped from 3.10% to 2.63%, with the improvement in asset quality being the most obvious. Management said that the company's credit cost and asset quality are optimistic and sustainable.
The company sold its life insurance subsidiary and reached an exclusive banking and insurance partner with AIA for 15 years. On March 24 this year, the company sold its wholly-owned life insurance subsidiary to AIA Group Limited for HK $5.07 billion. After reaching a strategic partnership, Bank of East Asia can make use of AIA's rich high-quality product resources to establish a regional multi-channel insurance distribution platform, which is expected to achieve growth in fee income in the future. A few days ago, the company said in a survey that the transaction is expected to bring a net profit of HK $1 billion, but the specific way and amount of the net profit will be distributed to shareholders still need to be further communicated with the HKMA.
What is the biggest difference between us and the market? We believe that the asset quality of the company has improved significantly compared with 2019, superimposed by the growth of public loans and the decline in credit costs brought about by the economic recovery, and the performance is expected to increase significantly in 2021.
Potential catalyst: the economic recovery of the mainland and Hong Kong is better than expected, and the retail loan business in the mainland is improving.
Profit forecast and valuation
The company raised its profit forecasts for 2021 and 2022 by 3.496 and 1.2 per cent to HK $4.064 billion and HK $4.535 billion due to improved asset quality and a sharp drop in credit costs. The current share price corresponds to 0.4 times price-to-book ratio in 2021 / 2022. Upgrade to neutral and maintain the target price of HK $16.50, corresponding to 0.5 times 2021 price-to-book ratio and 0.5 times 2022 price-to-book ratio, which has 30% upside from the current share price.
Risk
The macroeconomic recovery was not as good as expected, and the improvement in corporate credit risk was not as expected.