MARC AFFIRMS ITS FINANCIAL INSTITUTION RATINGS OF AAA/MARC-1 ON THE BANK OF EAST ASIA, LIMITED

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), Hong Kong. The outlook on the ratings is stable. The affirmed ratings and outlook are based on MARC’s assessment of the bank’s capacity to meet its financial obligations on the Malaysian national rating scale.

MARC considers BEA’s well-established banking franchise in Hong Kong and its sound asset quality as well as the bank’s healthy capital adequacy and comfortable funding profile as key rating factors. The ratings also incorporate the likelihood of systemic support extended to the bank based on its moderate to high systemic importance in Hong Kong. These positives notwithstanding, MARC views the bank’s performance to be vulnerable to any sharp downturn in the property sector in its core markets in Hong Kong and mainland China given its substantial loan exposure to this sector. The mitigating factors are, however, the bank’s good underwriting standard management and the Hong Kong banking regulator’s strong prudential oversight.

Founded in 1918, BEA is Hong Kong's largest independent local bank with total assets of HK$754 billion as of end-2013. Its early and steady expansion into mainland China through its wholly-owned subsidiary, The Bank of East Asia (China) Limited (BEA China) has enabled the bank to establish the second largest distribution network among locally incorporated foreign banks in the country. MARC observes that BEA China has been the primary growth driver of the bank’s loan book, with loans growing by 12.7% to HK$144 billion for 2013. BEA’s China operations accounted for 29.8% of the consolidated pre-tax profit for 2013. 

BEA’s profit after tax increased to HK$6,707 million during 2013 (2012: HK$6,154 million) on the back of a 25.1% increase in net interest income to HK$12,167 million due mainly to the strong growth of the group’s loan book. At the same time, net interest margin (NIM) rose to 1.83% (2012: 1.71%). MARC notes, however, that the bank’s impairment charges of HK$458 million have remained manageable relative to net interest income although it increased from HK$213 million in 2012. Non-interest income was lower in 2013 at HK$5,745 million (2012; HK$6,295 million) dragged mainly by losses sustained in the sales and revaluation of debt securities. Cost-to-income ratio improved to 55.5% during 2013 (2012: 57.7%, 2011: 62.9%) as revenue growth outpaced cost.

While MARC expects BEA’s operating performance to be underpinned by sound risk management and strong asset quality despite a slight weakening in asset quality metrics, risk to earnings growth could arise from any economic slowdown and potential problems in the property sector in Hong Kong and mainland China. The overall property loans accounted for a sizeable 35.7% of outstanding loans as at end-2013 (2012: 39.1%). MARC views the rapid pace of expansion of loans used in mainland China, where outstanding loans to total loans rose to 44.4% at end-2013 (2012: 43.3%), may have led to a weakening in asset quality; gross impaired loans to mainland China rose to HK$840 million in 2013 (2012: HK453 million). Asset quality as reflected by the gross impaired loan ratio stood at 0.39% at end-2013 (2012: 0.32%). MARC considers the bank’s allowance coverage ratio as satisfactory at 64.6%, although lower from 80.8% as at end-2012, and draws comfort from the collateral cover of security assets on the impaired loans of 2.4 times.

BEA has an adequate funding profile as the bank’s total deposits increased to HK$607 billion as at end-2013 (2012: HK$557 billion). However, the increase in deposits which lagged behind loan growth, led to a weaker loan-to-deposit ratio of about 70.1% in 2013 (2012: 66.7%). With respect to the bank’s capital ratios, MARC notes that the bank’s Basel III capital adequacy ratio (CAR) and Tier-1 CAR of 15.9% and 12.1% respectively at end-2013 were higher than the Basel II CAR and Tier-1 CAR of 14.3% and 10.7% respectively in 2012. Supporting the capital base was higher internal capital generation which outpaced the growth in risk-weighted assets and its scrip dividend scheme that amounted to HK$1,694 million. MARC considers BEA’s capitalisation to be healthy in relation to its risk profile given also that the bank plans to reduce its capital charge through greater allocation on lower risk capital-charge bearing assets and increasing its fee-based revenue. 

The rating outlook reflects MARC’s expectation that BEA will sustain its strong asset quality and maintain its profitability amidst pressure on NIM in the coming 12 to 18 months.

Contacts: Oo Chin Kai, +603-2082 2260/ chinkai@marc.com.my; Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.

March 6, 2014