1H23 performance is basically in line with our expectations.
The Bank of East Asia announced 1H23 results: revenue of HK $10.276 billion, an increase of 27% over the same period last year, and net profit of HK $2.337 billion, an increase of 114% over the same period last year, basically in line with our expectations.
Trend of development
The net interest margin rose 14bp to 2.03% from the previous month. The company said the improvement in net interest margin was mainly due to rising interest rates in money markets such as Hong Kong dollars and US dollars and an increase in the proportion of high-yielding Chinese mainland Internet loans. Looking ahead to the second half of the year, we believe that the overseas high interest rate environment is expected to continue, and HIBOR interest rates have rebounded significantly from the first quarter lows, so the company's net interest margin is expected to widen further.
The weak local demand superimposed the risk of removal of inner housing, and the scale of corporate deposits and loans declined. The total assets of Bank of East Asia at the end of 1H23, net customer loans and customer deposits decreased by 4%, 4% and 3% respectively compared with the same period last year. We believe that on the one hand, it comes from the lack of local credit demand in Hong Kong, and on the other hand, it comes from the company's exposure to Chinese mainland real estate. At the end of 1H23, the company's exposure to private housing was about HK $60 billion, a drop of about HK $10 billion from the end of last year, accounting for 10 per cent of total loans and bond investment. We expect there may be no significant improvement in credit demand in the second half of the year, and the company may continue to face shrinking pressure, but the decline is expected to be better than 1H23.
Insurance sales and loan commissions are the bright spots of fee income. The net handling fee income of Bank of East Asia (1H23) increased by 1% compared with the same period last year, of which loan commission and insurance sales increased by 18% and 16% respectively. We believe that the good performance of insurance sales is mainly due to the stimulated demand from Chinese mainland tourists after customs clearance. The number of new customers of the company 1H23 Chinese mainland is 5.7 times that of the same period last year. Although the company's end-of-term loan balance declined compared with the same period last year, customer activities such as trade and syndicated loans recovered during the period, leading to an increase in loan commission income.
The cost is well controlled, and the cost-to-income ratio is reduced to 45%. Bank of East Asia 1H23 operating expenses increased by 4% year-on-year, cost-to-income ratio of 45%, a year-on-year decline in 10ppt. We believe that the good cost control of the company is mainly due to the continuous digital investment and the reduction of the number of employees.
Credit costs fell from the previous month, and the non-performing rate rose 16bp to 2.56 per cent from the previous month. Bank of East Asia 1H23 provision provision of 2.492 billion Hong Kong dollars, credit cost of 0.92%, year-on-year, month-on-month changes in 15bp,-45bp.
The company's 1H23 final provision coverage rate is 37%, with a month-on-month decline in 10ppt. We believe that the main reason for the decline in provision coverage is that new non-performing loans were still generated in the first half of the year. The company said 85 per cent of the 1H23 provision was for exposure to private housing, and customers who were downgraded in the first half of the year had previously been considered high-risk. Looking ahead, considering that there is still exposure to internal housing exposure, we believe that 2H23's defect rate may rise further, and credit costs continue to decline month-on-month but are still higher than in normal years.
Profit forecast and valuation
Due to the better performance of net interest margin and fees than we had expected, the profit forecasts of 2023e and 2024E were raised by 4.4% and 9.7% to HK $5.611 billion and HK $6.636 billion respectively. The current share price corresponds to 0.3 times 2023E price-to-book ratio and 0.3 times 2024E price-to-book ratio. Keep the neutral rating and target price unchanged, corresponding to 0.4 times 2023E price-to-book ratio and 0.4 times 2024E price-to-book ratio, which has 19.7% upside compared to the current stock price.
Risk
The recovery of the main market economy is not as expected, and the exposure of inner housing continues to be exposed.