The performance in 2020 was lower than we expected.
The Bank of East Asia released its 2020 annual report: 2H20 revenue fell 7.5% year-on-year, and net profit of parent common shares fell 12.9% year-on-year, mainly due to narrowing of interest spreads after the epidemic (narrowing more than expected) For the whole year, bank revenue fell 12.4 per cent year-on-year to HK $17.3 billion, while net profit on parent common shares rose 9.4 per cent to HK $2.8 billion, mainly due to increased impairment losses on mainland real estate loans from a low base in 2019.
Trend of development
The spread narrowed further compared with the previous month. 2H20 spreads fell by 45.22bp to 1.37% year-on-year and month-on-month. Similar to other local banks in Hong Kong, it was mainly caused by the low-interest environment after the epidemic. At the end of 2020, Hong Kong customer loans increased by 2.1% year-on-year, bond investment increased by 5.3%, customer deposits increased by 3.8% year-on-year, 2H20 net interest income fell by 24.1% year-on-year (1H20 fell 17.4%) Considering that the low-interest environment is likely to remain for some time, we expect that bank spreads may still be under pressure in 2021. 2H20 non-interest income grew 41% year-on-year, mainly from government employment subsidies and transaction income. 2H20 net fee income fell 2.2% year-on-year, other non-interest income increased 114.9% year-on-year, excluding government subsidies increased 91.2% year-on-year. Among the fee income, securities brokerage business and investment product sales business performed better, but were dragged down by credit card and trade-related business. We expect fee income to improve slightly in 2021 as the epidemic abates and residents' activities resume.
The impairment loss for the whole year is lower than the high base in 2019, while 2H20 is basically the same as the same period last year. The defect rate at the end of the year was 1.26%, which increased 4bps from the previous month. Among them, the Hong Kong business defect rate rose to 0.75% from the previous month, and the mainland business defect rate decreased from the previous month to 70bps 3.10%. The credit cost of 2H20 was 0.79%, which was slightly lower than the same period last year. For the whole year, the credit cost is 0.91%, lower 53bps than in 2019, which is more exposed, but still higher than 67bps in 2018. We continue to pay attention to the asset quality of banks, especially the dividend ratio of their exposure in the mainland is unchanged from the previous month, slightly lower than the same period last year, while the capital adequacy ratio has increased slightly. 2H20 pays a dividend of HK $0.24 per share, with a dividend rate of 41% (down from HK $0.35 and 52% of 2H19), and HK $0.40 per share for the whole of 2020, which is lower than HK $0.46 and 52 in 2019.
(HK $1.18 and 57% in 2018), BEA's core tier one capital ratio, tier one capital ratio and capital adequacy ratio are 16.5%, 19.4% and 21.9% respectively.
We lowered our profit forecast for 2021 by 10.9% to HK $3.93 billion, mainly due to low asset returns due to easy credit, and introduced a profit forecast of HK $4.482 billion for 2022. Bea's current shares correspond to 0.5 times 2021 price-to-book and 0.5 times 2022 price-to-book. We maintain the outperform industry rating and target price of HK $16.50 (0.5 times 2021 price-to-book ratio and 0.4 times 2022 price-to-book ratio), which is 7.5% lower than the current share price. Risk macroeconomic recovery is not as good as expected.