Bank of East Asia's performance is basically in line with our expectations

Bank of East Asia announced 1H24 results: revenue of HK$10.484 billion, up 2.0% year on year; net profit to parent common stock of HK$1.813 billion, a decrease of 22.4% year over year. The large year-on-year decline in profit was mainly due to an increase in the level of expenses and provisions, and the performance was basically in line with our expectations.

Development trends

The company guides 2H24 net interest spreads to be stable. The net interest spread of 1H24 East Asia was 2.10%, up 7 bps year on year. Interest spreads for Hong Kong, mainland China and overseas businesses were +14bp, -6bp, and +7bp, respectively. The company stated that the narrowing of interest spreads in mainland China was mainly due to declining interest rates and a drop in the size of internet loans by companies. At the same time, 2H24's overall net interest spread is expected to remain basically stable compared to the first half of the year.

Non-commercial real estate loans are growing rapidly. At the end of 1H24, loans to East Asian customers increased 1% compared to the end of the previous year. Among them, non-commercial real estate loans increased 6% from the end of the previous year, commercial real estate loans decreased by 13% from the end of the previous year, and commercial real estate in Hong Kong and mainland China accounted for 12.2% and 5.9% of total loans, respectively, down 1.5ppt and 1.8ppt from the end of the previous year.

Fee performance is yet to be recovered. East Asia's 1H24 net handling fee revenue decreased 2.2% year over year, and improvements in insurance sales, wealth management product sales, and securities brokerage partially hedged the impact of poor loan commission performance; other non-interest income increased 7.3% year over year, and overall non-interest income increased 1.1% year over year.

The company guides steady commercial real estate exposure in Hong Kong, China. 1H24 Bank of East Asia calculated a credit impairment loss of HK$2.881 billion, with an annualized credit cost of 1.08%, up 16 bps year over year, but down 5 bps from 2H23. 52% of 1H24 credit impairment came from commercial real estate exposure in mainland China (80% in 2023), and 24% from commercial real estate exposure in Hong Kong, China.

At the performance conference, the company presented details of commercial real estate in Hong Kong, China. At the end of 1H24, 85% of the relevant exposure was collateral, and the average LTV was 51%. Among them, the LTV for good customers defined by the company was less than 50%, and the LTV for weak customers was about 60%. 1H24 did not downgrade any customer ratings, the level of non-performing rate is low, and the provision plus collateral coverage rate for commercial real estate bad exposure in Hong Kong, China is greater than 100%.

At the results meeting, the company indicated that 2H24 credit impairment accruals may be lower than 1H24. The non-performing ratio and non-performing loan balance are expected to remain stable in the second half of the year, and credit impairment accruals are expected to decline year-on-year for the full year of 2024.

The interim dividend payout ratio increased. The core Tier 1 capital adequacy ratio at the end of 1H24 was 17.1%, down 0.2ppt from the end of the previous year; the 1H24 mid-term dividend of HK$0.31 per share increased from 41% to 45% year over year.

Profit forecasting and valuation

The profit forecast remains essentially unchanged. The current stock price corresponds to 0.3 times the 2024E net market ratio and 0.3 times the 2025E net market ratio. The neutral rating and target price of HK$10.2 remain unchanged, corresponding to 0.3 times the 2024E net market ratio and 0.3 times the 2025E net market ratio. There is 6.8% upside compared to the current stock price.

risks

Real estate exposure risk exposure exceeded expectations, and interest rate levels fell more than expected.