THE BANK OF EAST ASIA, LIMITED - 2015

MARC has affirmed its long-term and short-term financial institution ratings of AAA/MARC-1 on Hong Kong-based 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.

MARC views BEA’s healthy capital position, strong earnings track record and funding profile as key rating factors. The ratings also incorporate MARC’s assessment on the probability of systemic support being extended to the bank based on its moderate systemic importance in Hong Kong. BEA is the largest independent bank in Hong Kong with a total asset size of HK$816.0 billion as at end-June 2015. Through its wholly-owned subsidiary The Bank of East Asia (China) Limited (BEA China), the bank has the second-largest distribution network among locally-incorporated foreign banks in China. BEA’s total advances to customers for use in mainland China, Macau and Taiwan accounted for 40.9% of its loan book compared to 44.1% in Hong Kong as at end-June 2015.

MARC notes that the sharp asset growth in China in recent years has been accompanied by steadily rising impaired advances as China experiences decelerating economic growth. Impaired advances to customers in China rose significantly to HK$3.9 billion (2014: HK$2.1 billion), accounting for 84.6% of the bank’s total impaired loans of HK$4.7 billion in 1H2015. The gross impaired loans ratio rose to 1.0% in 1H2015 (2014: 0.6%) and at the same time, the bank’s loan loss reserve ratio declined to 35.5% (2014: 49.5%). This notwithstanding, the market value of collaterals held on impaired loans has increased to provide a collateral cover of 1.8 times. Further, in response to the challenging conditions in China, BEA has tightened its credit lending policies. This is reflected in BEA China’s reduced loan portfolio with loan growth contracting by 2.2% year-on-year (y-o-y) in 1H2015 as opposed to 5.2% y-o-y growth in 2014.

MARC observes that combined with the loan growth contraction in China, BEA’s loan book grew at a slower pace of 3.2% y-o-y in 1H2015 (2014: 9.4%), with growth stemming from its domestic Hong Kong market. The property segments (property development, investment and purchases) collectively accounted for the largest portion of the bank’s loan book, comprising 46.7% and 40.2% of Hong Kong and mainland China’s loan books respectively as at end-June 2015. MARC considers exposure to the property market to pose risks to the bank, given the sharp rise in property prices in recent years and the increasing likelihood of a slowdown in the sector as economic conditions become more challenging. The flat growth in the property development and property investment segments in 1H2015 moderates concerns on asset quality weakness.

BEA recorded lower profit due to higher impairment charges and a compressed net interest margin which declined further to 1.7% in 1H2015 (2014: 1.8%). As a result, net interest income decreased by 1.0% to HK$6.2 billion while non-interest income decreased by 14.9% due to lower trading profit. Net profit decreased by 6.3% y-o-y to HK$3.4 billion, leading to a lower return on average equity of 9.2% and return on average assets of 0.9%.

BEA’s loan-to-deposit ratio increased to 75.7% as at end-June 2015 (2014: 72.1%) as loan growth outpaced the anaemic deposit growth; deposits from customers grew slower by 0.6% y-o-y while time deposits contracted during this period. However, CASA deposits recorded stronger growth with the CASA-to-total deposit ratio increasing to 30.9% (2014: 28.4%). The bank’s average liquidity coverage ratio during the second quarter of 2015 stood at 137.5%, well above the minimum regulatory requirement of 60% for 2015.

BEA remains well-capitalised with key ratios well above regulatory requirements; CET1 capital ratio, Tier 1 capital ratio, and total capital ratio improved to 13.2%, 13.8% and 17.6% as at end-June 2015 (2014: 11.8%, 12.5%, and 16.7%). The improvement was largely on the back of an increase in capital base following the additional subscription of capital by Sumitomo Mitsui Banking Corporation (SMBC) of HK$6.6 billion during 1H2015. This subscription will support the capital base as non-Basel III-compliant instruments which constitute about 14.5% of the total are steadily phased out.

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. 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 strong foothold in mainland China;
• Resilient earnings generation; and
• Comfortable funding profile.

Challenges/Risks

• Strong competitive environment; and
• Impact from slowdown in China on growth and asset quality.