The Bank of East Asia, Limited - 2017

MARC has affirmed its long-term and short-term financial institution (FI) 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.

The ratings incorporate BEA’s well-established banking franchise in Hong Kong and mainland China, its position as the fifth-largest bank on the island in terms of asset size and its strong capital position that provides buffer against any increase in asset quality risk. The ratings also consider BEA’s systemic importance in Hong Kong as moderate in light of the Hong Kong Monetary Authority’s (HKMA) recent implementation of regulations to provide clarity on resolution measures at the point of non-viability for systemically important FIs in Hong Kong.

As at end-June 2017, BEA’s gross impaired loans ratio remained unchanged at 1.5% but was higher than the Hong Kong banking industry average. The bank’s ongoing de-risking efforts, including reducing exposure to riskier segments, have contributed to asset quality stability. Its wholesale and retail trade segment, which constituted the largest proportion of impaired loans at 32.9%, contracted in loan size in 1H2017. While total gross impaired loans increased at a more moderate pace of 2.8% during 1H2017, the bank’s asset quality metrics could come under pressure if the property market weakens, given its sizeable exposure to property loans which accounted for 52.7% and 49.5% respectively of total loans in Hong Kong and mainland China as at end-1H2017. This exposure is partly mitigated by the bank’s low loan-to-value ratio of about 60%. MARC also notes that the bank’s capital position remained strong and offers some buffer against asset quality weakness: its CET1 capital ratio and total capital ratio improved to 12.3% and 17.5% respectively as at end-June 2017.

During 1H2017, BEA’s loan book grew by a modest 2.7% to HK$466.6 billion, comprising 4.0% growth in loans for use in mainland China (end-2016: negative 6.7%) and 2.2% growth in Hong Kong (end-2016: 2.8%). The bank’s loan growth remains lower than the industry average of 10.2% and 11.9% in Hong Kong and China respectively, reflecting the bank’s stance of maintaining tight lending standards for certain sectors, including wholesale and retail trade, manufacturing and hotel. For 1H2017, net interest income grew by 4.7% y-o-y to HK$5.7 billion on a higher loan base. BEA’s performance was also supported by a 33.6% y-o-y decline in total impairment charges during the period. MARC notes that the bank’s operating expenses declined by 7.9% y-o-y to HK$3.9 billion for 1H2017 (1H2016: HK$4.2 billion), benefitting from the ongoing cost reduction programme, which includes rationalising its branch network, converting existing branches to digital branches and streamlining its operational process.

Profit after tax increased to HK$7.3 billion in 1H2017, benefitting from gains on the disposal of its subsidiary Tricor Holdings Limited (HK$4.1 billion). Excluding the one-off gain, the bank’s profit after tax would be HK$3.2 billion (1H2016: HK$2.0 billion). BEA’s funding and liquidity profiles remained sound, with the loans-to-customer deposits ratio (LDR) standing at 79.7% as at end-June 2017 (2016: 80.4%) while the average liquidity coverage ratio for 2Q2017 stood at 129.5%, well above Hong Kong’s regulatory minimum requirement of 80%.

The ratings outlook reflects MARC’s expectations 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 China’s economy over the next 12 to 18 months.

Major Rating Factors

Strengths

• Well-established presence in Hong Kong and China
• Improving cost management; and
• Sound funding profile.

Challenges/Risks

• Strong competitive environment; and
• Sizeable exposure to the property sector in Hong Kong and China