2H23 results fell far short of our expectations
The Bank of East Asia announced 2H23 results: revenue, profit before provision, and net profit to mother changed by 6%, 12%, and -54% year-on-year respectively, and 16%, 30%, and -4% year-on-year for the full year of 2023. The sharp drop in performance compared to our expectations was mainly due to the company's impairment of HK$726 million against AFFIN Bank, where it holds shares. If this effect is excluded, the company's net profit to mother is in line with our expectations.
Development trends
Net interest spreads performed well, and the loan size stopped falling at 2H23. The Bank of East Asia's net interest spread in 2023 was 2.14%, up 49 bps year over year, which is basically in line with our expectations. Customer loans declined 3% year over year at the end of 2023. Among them, 2H23 remained stable month-on-month. The decline in loan size was mainly due to poor local credit demand in Hong Kong, China and the company's active reduction in loan concentration in the real estate industry. The company's performance will further reduce real estate-related exposure and be cautious about 2024E loan growth guidelines.
Non-interest income fell short of our expectations, and expenses were well controlled. 2H23's net handling fee revenue decreased 9% year over year, and other non-interest income decreased 47% year over year. In 2023, the company's expenses increased 2% year over year, and the cost-revenue ratio fell to 45%. The cost growth rate was low among peers.
Credit costs remain high. 2H23 Bank of East Asia's credit impairment was HK$3 billion, a year-on-year decrease of 21%; the full year of 2023 was HK$5.5 billion, a year-on-year decrease of 7%. Credit costs were 1.01%, and the absolute level was still high. The company said 82% of the 2023 credit impairment came from mainland China's exposure to public real estate. Specifically, at the end of 2023, the company's public exposure in mainland China was about HK$54 billion (7.7% of total loan and bond investment), a pressure drop of HK$16 billion from the end of the previous year, including HK$3.5 billion in write-offs; for mainland China's exposure to public real estate, the company had a corresponding provision balance of HK$4.1 billion, with a provision coverage rate of about 40%.
The dividend per share fell short of our expectations, but the company announced a new round of share buybacks. At the end of 2H23, the company's core Tier 1 capital adequacy ratio was 17.3%, up 0.6ppt from the previous month. The company announced a year-end dividend of HK$0.18 per share and a dividend payout ratio of HK$0.54 per share for the whole year, with a dividend ratio of 41%. We believe that the main reason the dividend fell short of our expectations because the impairment against AFFIN dragged down net profit. At the same time, the company announced a new round of HK$500 million share repurchases. This is another time the company announced its share repurchase plan after August 2022.
Profit forecasting and valuation
Considering that mainland China's real estate exposure asset quality is still highly uncertain, we expect the company's credit costs to remain at a high level, lower the 2024E profit forecast by 11.2% to HK$5.126 billion, and introduce a 2025E profit forecast of HK$5.299 billion. The current stock price corresponds to 0.3 times the 2024E net market ratio and 0.3 times the 2025E net market ratio. Although credit costs are still uncertain, higher shareholder returns are expected to support the company's stock price, keeping the neutral rating and target price of HK$10.80 unchanged, corresponding to 0.3 times the 2024E net market ratio and 0.3 times the 2025E net market ratio. There is 8.1% upside compared to the current stock price.
risks
Market interest rates fell more than expected, and real estate-related exposure risks were exposed.