P R E S S A N N O U N C E M E N T
FOR IMMEDIATE
RELEASE
MARC
AFFIRMS ITS FINANCIAL INSTITUTION RATINGS OF AAA/MARC-1 ON THE BANK OF EAST
ASIA, LIMITED
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 rating reflects 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 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 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.
Contacts:
Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my;
Ezra Vendargon, +603-2082 2257/ ezra@marc.com.my.
December 31,
2014
