The Bank of East Asia, Limited - 2014

MARC has affirmed its long-term and short-term financial institution ratings of AAA/MARC-1 on The Bank of East Asia, Limited (BEA). The outlook on the ratings is stable. The affirmed ratings reflect the bank’s capacity to meet its financial obligations on the Malaysian national rating scale.

Hong Kong-based BEA has a well-established banking franchise, characterised by sound asset quality and a healthy capital position. These factors, coupled with a strong earnings track record and funding profile, have continued to support the ratings. MARC has also considered the high likelihood of systemic support being extended to the bank based on its moderate to high systemic importance in Hong Kong. BEA is the largest independent bank in Hong Kong with a total asset size of HK$805 billion as at end-June 2014. Through wholly-owned subsidiary The Bank of East Asia (China) Limited (BEA China), the bank has steadily expanded its operations into mainland China and has the second-largest distribution network among locally incorporated foreign banks in the country. BEA’s total advances to customers in China accounted for 47% of its loan book compared to 43% in Hong Kong as at end-June 2014.

MARC observes that in tandem with the sharp growth of lending activities in China, BEA is increasingly exposed to China’s challenging economic performance, resulting in weakening asset quality metrics. Impaired advances to customers in China rose significantly to HK$1,226 million while the gross impaired loan ratio increased to 0.44% in 1H2014 (2013: HK$840 million; 0.39%). The bank’s loan loss reserve ratio also declined to 59.9% (2013: 64.6%). Despite the decline, asset quality has generally remained sound, although further weakening in property prices in China could exert more pressure on the bank’s asset quality metrics. Nonetheless, this is expected to be mitigated by the relatively good underwriting standards the bank maintains and the proactive stance of its management to shift its business focus to more fee-based income. For 1H2014, loans for use in China grew at a slower pace of 11.6% year-on-year (2013: 18.5%).   

MARC notes the weaker loan growth in China was offset by higher growth in BEA’s domestic market, resulting in a fairly strong loan book growth of 14.5% year-on-year (2013: 15.6%). BEA’s profits remained resilient despite higher impairment charges and pressure on funding costs in China. For 1H2014, profit after tax rose 6.0% to HK$3,580 million, although impairment charges rose sharply to HK$319 million (1H2013: HK$182 million) while the net interest margin (NIM) declined to 1.7% (2013: 1.9%). For 1H2014, net interest income increased by 10.2% to HK$6,241 million. However, non-interest income rose by 11.5% to  HK$2,961 million in  the same  period  due mainly to higher fee and commission income, which were attributed to BEA China’s shift in focus to arranging more offshore loans. The cost-to-income ratio improved to 53.2% (1H2013: 54.2%) on higher total income, despite an 8.6% increase in operating expenses. The return on average asset and average equity were steady at 0.9% and 11.2% respectively relative to year-end 2013 levels.

BEA’s funding profile remained stable with a LDR of 72.1% as at end-June 2014. Customer deposits, mainly time deposits, grew by 4.6% to HK$559.5 billion during 1H2014, offsetting a decline in current accounts, and saving account deposits (CASA). The CASA-to-total deposit ratio decreased to 25.8% (2013: 28.1%). With regard to BEA China, its LDR of 68.3% is below the maximum regulatory limit of 75% in China. MARC notes that the recent relaxation of the LDR calculation rules in China should provide more flexibility to increase lending in China. 

BEA remains well capitalised as reflected by its CET1 capital ratio of 11.6%, Tier 1 capital ratio of 12.2% and total capital ratio of 15.7% as at end-June 2014 (2013: 11.4%; 12.1%; 15.9%). The capitalisation ratios are well above regulatory requirements. BEA’s CET1 level rose by 3.8% to HK$51.1 billion, partly attributed to internal capital generation. In addition, ordinary share issuances under the scrip dividend scheme raised HK$1,096 million in 1H2014 (1H2013: HK$992 million). Nonetheless, the bank’s total capital ratio was lower than the end-2013 levels owing mainly to an increase in risk-weighted assets and a decline in Tier 2 capital on phasing out of non-Basel III-compliant instruments. 

The rating outlook reflects MARC’s expectation that BEA will maintain its asset quality metrics and profitability measures that are commensurate with the rating band amid a challenging economic environment. The stable outlook also assumes no significant deterioration in the macroeconomic conditions of China and Hong Kong over the next 12 to 18 months.

Major Rating Factors

Strengths

• Well-established presence in Hong Kong and a good foothold in mainland China;
• Resilient earnings generation; and
• Comfortable funding profile.

Challenges

• Strong competitive environment; and
• Impact from China’s financial sector reforms on growth and asset quality.