1H22 performance is slightly higher than we expected.

Bank of East Asia announced 1H22 results: revenue of HK $8.118 billion, down 3.5% from the same period last year, and net profit of HK $1.499 billion, down 43.9% from the same period last year, slightly higher than we expected, mainly due to a 5.2% year-on-year reduction in operating expenses, which is better than we expected.

Trend of development

The month-on-month ratio of interest rate spreads between the two places has improved and there is still great flexibility in the second half of the year. Bank of East Asia 1H22 spread 1.42%, month-on-month increase in 7bp. Among them, Hong Kong spread 1.04%, month-on-month improvement in 7bp, mainly due to the increase in HIBOR level in the first half of the year; Chinese mainland spread 1.79%, month-on-month improvement in 2bp, mainly due to the resumption of Internet financial business. As of August 18, the one-month HIBOR level has risen to 1.90%, significantly higher than the 0.87% at the end of June, while the mainland Internet financial business can continue to make a positive contribution to interest spreads, so we believe that there is room for further improvement in the second half of the year.

Cost control is beginning to take effect, with cost-income falling for the first time in two years. Bank of East Asia 1H22 operating expenses decreased 5.2% year-on-year, 54.3% of the company's cost-to-income ratio, falling for the first time in nearly two years, mainly due to the promotion of the company's cost control plan, which saved a total of HK $195 million in the first half of the year.

Retail banking is the core contribution of cost savings, mainly due to digital transformation and streamlining of operations, the cuts are mainly concentrated in the middle and background, while the front desk sales staff are not falling but increasing. At the same time, the bank performance meeting said that science and technology investment currently accounts for 20% of the total cost, and will continue to invest heavily in science and technology in the future.

Mainland real estate exposure has led to a substantial increase in provisions. Bank of East Asia made a provision of HK $2.136 billion for 1H22, an increase of HK $1.555 billion over the same period last year, credit costs rose 56bp to 0.78% year-on-year, and the defect rate rose 37bp to 1.58% year-on-year, mainly from mainland property exposure. As of the end of 1H22, BEA's loans to public property in mainland China totaled HK $86 billion (12 per cent of the total loans), of which 30 per cent were low-risk state-owned enterprises and 70 per cent were private enterprises. HK $14 billion of private enterprise exposure is high-risk, including 1-pound 3 bad loans and 2-pound 3 concern loans. For high-risk loans, the company has a provision of HK $2.3 billion and a collateral value of HK $5 billion, with a loan-to-loan ratio of 3% for mainland property exposures, and the remaining exposure may need to be increased in the event of further exposure. The bank performance meeting said that under the benchmark scenario, the credit cost in 2022 may be better than that in 2019 (1.44% in 2019), and we expect the company's full-year credit cost to be 0.77%.

The announcement of HK $500 million buyback and the proceeds from the sale of the Blue Cross may be further used for shareholder returns. By the end of 1H22, the core tier one capital adequacy ratio of Bank of East Asia was 15.7%, a month-on-month decline in 1.3ppt, mainly due to equity buybacks, exchange rates and rising risk-weighted assets, but there is still a large buffer space. The company announced a new HK $500 million buyback plan and said the board would discuss the disposal of the proceeds from the sale of the Blue Cross or further reward shareholders in the form of special dividends and share buybacks.

Profit forecast and valuation

Keep profit forecasts for 2022 and 2023 unchanged. The current share price corresponds to the 2022 mark-to-market ratio of 0.3 / 0.3 times book value in 2023. Maintain the neutral rating and the target price of HK $12.50, corresponding to 0.3 times 2022 and 0.3 times 2023, with 25.0% upside compared to the current share price.

Risk

The exposure of mainland real estate is further exposed.