The Bank Of East Asia, Limited - 2012

MARC has affirmed its long-term and short-term financial institution ratings of AAA/MARC-1 on The Bank of East Asia, Limited (BEA), Hong Kong. The ratings are based on MARC's assessment of the bank's capacity to meet its financial obligations on the Malaysian national rating scale. The outlook on the ratings is stable. BEA’s current ratings reflect its long-established banking franchise in Hong Kong and mainland China, its sound asset quality metrics, healthy capital adequacy, comfortable funding and liquidity profile, and stable core earnings capacity. The rating agency considers BEA to have moderate to high systemic importance in Hong Kong, and accordingly believes that systemic support is likely to be extended to the bank, if required.

MARC considers BEA’s geographic and client diversity as positive rating factors and BEA’s good underwriting standards management and its regulatory authorities’ strong prudential regulation of banks as important risk-mitigating factors with respect to BEA’s substantial property finance exposure which carries an increased risk of a correction in property prices in Hong Kong and mainland China. The rating agency believes that the bank’s resilience against economic volatility in its core markets of Hong Kong and China is relatively high, given its sound risk management system and strong asset quality. At the same time, MARC expects the group’s profitability to be pressured by declining interest margins over the coming 12 to 18 months. The group’s below-peer average profitability is balanced by its consistent profitability and the risk profile of its Hong Kong and China loan portfolios.

Founded in 1918, BEA is Hong Kong's largest independent local bank. BEA aims to strengthen its franchise on the mainland and continues to grow its presence in China through its wholly-owned subsidiary, The Bank of East Asia (China) Limited (BEA China). BEA China operates the second largest distribution network in China among the locally incorporated foreign banks, and continues to expand its network across mainland China with continued branch network investments. Approximately half of BEA’s consolidated pre-tax profits for the first six months of 2012 (1H2012) came from its Hong Kong banking operations, while its China operations contributed 33%.

BEA posted a higher profit after tax of HK$3.0 billion for 1H2012 compared to the HK$2.8 billion achieved for 1H2011. The group’s net interest income increased 5.0% year-on-year compared to 1H2011, reflecting the more moderate growth pace of its interest-earning assets. The bank’s net interest margin (NIM) narrowed due to increased competition for deposits. BEA’s net fee and commission income was up by 9.5% compared to the preceding year’s corresponding quarter while net trading profits were largely  unchanged from 1H2011 levels. BEA’s 1H2012 results  were also boosted by  fair value securities gains of HK$278 million (1H2011: HK$179 million loss), as well as disposal gains from several properties  and assets. The bank’s stronger operating income helped offset higher impairment charges on loans and advances of HK$125 million. BEA’s cost-to-income ratio improved to 56.0% in 1H2012 from 57.3% in 1H2011 as its income growth outpaced costs. MARC believes that the group will continue to show a stable operating performance and expects the bank to remain consistently profitable. Nonetheless, the rating agency believes some moderation in earnings growth is likely on account of NIM compression, moderation in loan growth and fierce competition. The bank’s NIM is expected to remain under pressure in 2013, along with those of other banks in its core markets.

Despite a relatively fast pace of annual loan growth in 2010 which moderated in 2011 and through 1H2012, BEA’s reported asset quality has remained consistently strong. The maintenance of the group’s strong asset quality in its loan book is largely attributable to its focus on the higher end of the credit quality spectrum. The group’s asset quality continues to improve, with absolute gross impaired loans declining to HK$1.2 billion, translating into a gross impaired loans ratio of 0.37% as at end-June 2012. As of end-June 2012, 71% of the group’s advances were secured by collateral, in light of which BEA’s allowance coverage ratio of impaired loans of 74.6% appears to be satisfactory. While the group’s asset quality is somewhat sensitive to the health of the property sector in Hong Kong and China, its strict origination practices and proactive credit risk management moderate concerns over a possible spike in impaired loans arising from shocks to the property markets in Hong Kong and China.
 
MARC considers BEA’s funding profile to be satisfactory, while noting a sequential decline in its current and savings account (CASA) ratio, which dropped further to 27.1% as at end-June 2012 (end-2011: 28.1%; end-2010: 33.4%). The bank’s loan-to-deposit ratio was maintained at 67.2% at end-June 2012, unchanged from its end-2011 level, supported by growth in term deposits and issued certificates of deposits.
 
As of end-June 2012, BEA’s capital adequacy ratio (CAR) has declined relative to year-end 2011 levels, although its Tier-1 CAR has improved on account of new ordinary capital shares issued pursuant to its scrip dividend scheme and the exercise of options granted under approved staff share option schemes. During 2011, a sum of HK$76.76 million standing to the credit of BEA’s share premium account was capitalised and applied in paying up in full for the 2010 final dividend and 2011 interim dividends in scrip. The bank had also issued additional term subordinated debt with a face value of S$800 million maturing in 2022 under its US$3.0 billion multi-currency Euro Medium Term Note Programme. BEA recently announced plans to raise HK$3.3 billion of new capital from an equity private placement following which BEA’s total capital adequacy ratio (CAR) and Tier-1 CAR will respectively increase by approximately 75 basis points. Overall, MARC views the BEA to be soundly capitalised relative to its risk profile.

The ratings outlook incorporates MARC’s expectation that BEA would maintain a financial profile commensurate with the ratings over the coming 12 to 18 months.

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