Performance foresight
We estimate that the revenue of 23H1 Bank of East Asia is + 26.7% year-on-year, and the homing net profit is + 80.9% year-on-year; 2023-2025 net profit year-on-year + 37.46%,-0.25%, + 5.71%. The original profit forecast is 2023-2024 year-on-year net profit of-20.54% 9.81%. Taking into account that Bea has carefully combed its property-related business in various regions and made corresponding provisions, while the exposure related to inner housing has fallen from more than 15 per cent to less than 10 per cent since 2015. We believe that looking ahead, its asset quality is expected to bottom out, while the company continues to buy back to support shareholder returns (the average number of shares repurchased by the company on the day since October 2022 / the average number of shares traded by the company is about 20%), we upgrade the rating to "better than the market", giving 23-year PBR 0.40x (the original valuation is 23-year PBR 0.30x), corresponding to the target price HK$14.42 (original target price HK$10.77).
Key hypothesis
We expect the quality of real estate-related assets to be bottomed out for continuous improvement. The management guidelines in mid-23 will be a downward inflection point in the cost of credit. The company has sorted out its real estate-related businesses in various regions and has been reducing its high-risk exposures, such as those related to inner housing, which have fallen from more than 15 per cent to less than 10 per cent since 2015. At the same time, the company is also arranging for the restructuring and sale of exposed assets to improve the quality of its balance sheet. We estimate that the credit cost of 23H1 company will be 85 BP, and in 2023-2025, the credit cost will gradually decline between 0.73% and 0.60%, and the bad rate will also show a downward trend, and the overall defective rate will remain stable or repeat slightly.
We expect the Bank of East Asia's net interest margin to continue to expand in 2023, with net interest income + 26.7% year-on-year. The model reflects that the 23H1 net interest margin is 2.00%, which is larger than the 1.65% 35bps for the whole of 2022. The net interest margin was 2.05% in 2023 and fell to 1.90% and 1.83% respectively in 2024-2025. Mainly due to the rise in HIBOR in one month during the period, while the Bank of East Asia is more sensitive to spreads, the average one-month HIBOR of 23H1 is 3.52%, an increase of 3.28pct over the same period last year and an increase of 2.03pct over the whole of 2022. As the demand for local deposits and loans in Hong Kong still needs to be improved, we conservatively estimate that the total amount of 23H1 loans is-0.60% higher than that at the end of last year, and customer deposits are-0.66% higher than at the end of last year.
The pressure on non-interest income has eased somewhat. We expect the growth of securities and brokerage, trust and other agency business related to market returns in net fees to remain weak, but less stressful than before. At the same time, with the help of the cooperation with AIA, the growth rate of fee income brought by insurance sales in bancassurance channel is expected to continue to be excellent, while the credit card industry will improve. HKMA industry data show that the average total amount of credit card receivables is + 14.6% year-on-year in 23Q1.
Risk:
The extent and speed of interest rate cuts are greater than expected, and the quality of assets is lower than expected.