The performance in the first half of 2017 exceeded expectations
The Bank of East Asia announced results for the first half of 2017: revenue of HK $7.6 billion, an increase of 7% over the same period last year; excluding the after-tax gain of HK $3 billion from the sale of Zhuojia Group, recurrent net profit was HK $3.2 billion, an increase of 60%, or HK $0.43 per share. The company declared an interim dividend of HK $0.68 per share, up 143% from a year earlier.
Trend of development
Cost control has been effectively implemented, with the cost-to-income ratio at the group level and mainland operations falling 9 percentage points to 54 per cent and 11 percentage points to 61 per cent respectively compared with the same period last year.
As Bea has reached 67% of its three-year cost-cutting target, the marginal impact of cost control is expected to decline over the next year and a half.
The non-performing loan ratio remained at 1.49 per cent, while the non-performing loan ratio for mainland operations rose to 2.79 per cent (down from 8bps on a month-on-month basis). The reserves drawn by the Bank of East Asia in the current period fell by 39% compared with the same period last year, resulting in a decline in credit costs by 33bps (down 24bps from the same period last year). As a result, reserve coverage decreased by 2 per cent to 54 per cent month-on-month.
The net interest margin increased by 3bps to 1.64% from the previous month, mainly due to the 5bps increase in the net interest margin of the mainland business. Due to mainland liquidity tightening and continued de-risk, management guidance on the outlook for net interest margin is more conservative.
The loan balance grew 2.7 per cent month-on-month, down from 10 per cent in the first six months of 2017. Mainland loans increased by 4.1% month-on-month, contributing 57% of new loans.
Considering that the company's net interest margin may face challenges in the future and the loan growth rate is lower than the inter-bank growth rate, we remain concerned about the revenue growth of the Bank of East Asia.
Profit forecast
Taking into account the better-than-expected implementation of cost control, stable asset quality and reduced provisions, we raised our profit forecasts for 2017 and 2018 by 56 per cent and 57 per cent to HK $9.2 billion and HK $6.7 billion, respectively.
Valuation and suggestion
At present, the company's share price corresponds to 1.1 times the expected 2017 Pamp B. Considering that the growth trend of the company's revenue is still uncertain, we remain evasive, but considering raising our earnings forecast, we raise our target by 5% to HK $30.3, which is 13% lower than the current share price.
Risk.
Loan growth increased; net interest margin returned to better than expected.