Bank of East Asia benefited from the market interest rate environment and the resumption of business activities after full customs clearance between Hong Kong and the Mainland in the first half of 2023. Performance performance improved markedly, but pressure on the quality of real estate assets in the mainland still exists. The company's subsequent profit growth elasticity comes from the release of credit costs after credit risk management.
Matters: The Bank of East Asia released its 2023 mid-year report. In the first half of the year, it achieved operating income of HK$10.28 billion and net profit of HK$2.64 billion, a year-on-year difference of +26.6%/+75.9%, respectively; the non-performing loan ratio was +16 bps to 2.56% at the end of the previous year.
Business performance picked up markedly. Bank of East Asia 2023H1 revenue +26.6% yoy (10.26% yoy in 2022); net profit of the parent company +75.9% yoy (-17.29% yoy in 2022). Looking at the breakdown of profit factors: 1) On the revenue side, the company's 2023H1 net interest income/service fee and net commission income/other non-interest income were +27.99%/+0.69%/-7.90% year-on-year, respectively. The sharp increase on the net interest side mainly benefited from interest rates in the Hong Kong, China market rebounding to a high level; on the non-interest side, the Bank of East Asia's net income from service fees and commissions remained basically the same; and other non-interest income declined due to one-time factors. 2) On the expenditure side, the company's 2023H1 cost to revenue ratio was 44.7%, an improvement of 9.6pcts over the previous year. Bank of East Asia's operating efficiency continued to improve, offsetting the company's investment in talent, sales staff and digital capabilities. 3) On the provision side, Bank of East Asia 2023H1 impairment losses were +16.9% yoy, of which loan impairment losses were +30.2% yoy. They are still more cautious in dealing with risks.
The size of assets and liabilities declined slightly, and interest spreads benefited from a high interest rate environment. 1) The size of assets and liabilities declined slightly. Bank of East Asia's total assets and liabilities at the end of the first half of 2023 was -1.2%/-1.5% respectively compared to the beginning of the year. Among them, total loans and deposits were -3.2%/-3.5% compared to the beginning of the year, and the total amount of mainland loans was -9.0% compared to the beginning of the year. Credit growth converged mainly because the company prioritized reducing corporate loan portfolio risk and improving risk-weighted asset efficiency, further reducing risk exposure to the commercial real estate industry. 2) Interest spreads benefit from a high interest rate environment. The company's 2023H1 interest spread was 2.03%, +15 bps compared to the previous year. Among them, the estimated yield for interest-bearing assets was +93 bps to 4.40% compared to the second half of 2022, and the estimated cost rate for interest-bearing debt was +96 bps to 3.00% compared to the second half of 2022. It mainly benefited from the continued rise in US dollar interest rates over the past year, driving up interest rates in the Hong Kong, China market.
Non-interest income has remained stable for the most part. 1) Stable net income from service fees and commissions. The company's 2023H1 net income from service fees and commissions was +0.7% year-on-year, which was basically the same. Among them, net income from service fees and commissions from loan business and third party insurance policy sales was +17.3%/+15.7% year-on-year respectively, mainly benefiting from the economic recovery and restoration of customs clearance in mainland China and Hong Kong. The wealth management income of private banks is improving. Driven by the growth of mainland customers, the number of new private bank customers recorded a high double-digit increase, but investment product commissions and securities brokerage commissions were -23.7%/-33.1% year-on-year during the same period. Mainly due to poor market sentiment, clients' investment activity remained low. 2) Other non-interest income declined once due to the impact of the base figure. The company's 2023H1 other non-interest income was -7.9% year over year. The main reason is that the company sold Blue Cross (Asia Pacific) Insurance Limited in August 2022. Other operating income fell by -54.7% year on year. Excluding this factor, other non-interest income was +13.0% year over year.
Asset quality still needs to be repaired, and provision coverage has declined. 1) The non-performing rate has increased slightly, but the mainland's non-performing rate has improved. At the end of the first half of 2023, the Bank of East Asia's non-performing loan ratio was +0.16pct to 2.56% compared to the end of 2022. Among them, the non-performing loan ratio in Hong Kong was +0.76pct to 1.47% at the end of 2022; the non-performing loan ratio in the mainland was -0.6pct to 5.28% compared to the end of 2022; and the non-performing loan ratio in other regions was less than 1%. 2) There has been a decline in provision coverage. At the end of the first half of 2023, Bank of East Asia's loan impairment preparations were -18.7% compared to the end of the previous year, and the provision coverage rate was -10.7 pcts to 39.6% compared to the end of the previous year. Among them, the Hong Kong region was -27.5 pcts to 38.2% compared to the end of the previous year, and the Mainland was -7.9 pcts to 35.5% compared to the end of the previous year.
Risk factors: The macroeconomic growth rate fell short of expectations, and asset quality deteriorated sharply; the level of net interest spreads fell short of expectations; the implementation of stable real estate policies fell short of expectations; and industry regulatory policy adjustments.
Investment recommendations: performance improvement, structural adjustment. Bank of East Asia benefited from the market interest rate environment and the resumption of business activities after full customs clearance between Hong Kong and the Mainland in the first half of 2023. Performance performance improved markedly, but pressure on the quality of real estate assets in the mainland still exists. The company's subsequent profit growth elasticity comes from the release of credit costs after credit risk management. Considering the significant improvement in the company's operating performance, we adjusted the company's 2023/24 EPS forecast to HK$1.98 /HK$2.25 (the original forecast was HK$1.41 /HK$1.80) and added the EPS forecast for 2025 to HK$2.38. The current H-share price corresponds to 0.26xPb in 2023.