The Bank of East Asia (BEA) said efforts to arrest a surge in bad loans in its mainland China business are paying off, as earnings improved from its worst year in a decade despite pressure from the coronavirus pandemic in its two biggest markets.
Hong Kong’s largest independent and family-run lender said while the outlook for the mainland economy is “considerably worse” than it was at the start of the year, there is optimism that activity will improve in the second half.
The banking group, whose business is focused primarily on Hong Kong and mainland China, reported a 53 per cent increase in profit to HK$1.53 billion (US$197.4 million) in the six months through June 30 from a year earlier. Net charge for impairment losses almost halved from a year earlier and losses in its mainland operations narrowed.
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The 101-year-old bank announced in February that it was reorganising its mainland operations after posting its worst annual results in a decade last year . The bank said it would continue to “actively manage its asset quality in this challenging macro environment” after its attempts to to tap growth potential in lower-tiered cities in China backfired with rising loan delinquencies, particularly in the commercial property sector.
Mainland banks reported a drop in earnings last quarter as bad-loan ratio rose to a decade-high. China’s banking regulator last month asked them to make preparations for a “big rise” in delinquencies as the nation’s financial system braces for shocks from the coronavirus at home and a hostile environment abroad.
“Beyond the immediate impact of Covid, political and compliance risks are on the rise given the escalating Sino-US geopolitical tensions,” Adrian Li Man-kiu, co-chief executive, said on a conference call with journalists. “We shall watch the changing circumstances closely and adapt to new regulations and sanctions.”
Relations between Washington and Beijing have become increasingly strained this year over a variety of issues, including technology, trade and Hong Kong’s autonomy.
This month, the US sanctioned 11 Hong Kong and mainland officials, including Chief Executive Carrie Lam Yuet-ngor, following Beijing’s decision to impose a controversial national security law for the city, which critics have claimed could stifle speech and other freedoms in the former British colony.
“The sanctions do not have a significant impact on our business operations,” Li added. “The bank has established procedures to comply with all laws and regulations, as well as treating our customers fairly.”
BEA’S shares declined 0.4 per cent to close at HK$18.10 in Hong Kong on Thursday.
The lender said that its net charge for impairment losses fell sharply to HK$2.9 billion in the first half largely due to reductions in losses in its mainland business. That compared with a charge for impairment losses of HK$5.1 billion in the prior year period.
The bank’s mainland business reported a pre-tax loss of HK$602 million in the first six months of 2020, compared with a loss of HK$3.8 billion a year earlier. In Hong Kong, pre-tax profit fell to HK$1.41 billion from HK$3.69 billion a year earlier, driven by higher loan provisions, compression of its net interest margin and mark-to-market revaluation losses on its debt and equity portfolios.
His brother Brian Li Man-bun, also co-chief executive, said BEA took an “extremely prudent” approach to its loan book in the mainland, reducing its corporate loan balances by 6.8 per cent year-to-date and cutting its reliance on stressed segments, such as the property sector.
BEA said its overall impaired loan ratio worsened to 1.29 per cent at the end of June from 1.22 per cent at the end of December 2019, with both mainland and Hong Kong units reporting higher ratios. In Malaysia, the bank suffered an impairment loss of HK$220 million from its share of an associate unit.
The bank said the impaired loan ratio for its mainland business remained at an elevated level of 3.92 per cent in June, but that was mainly a result of delayed recovery from the economic fallout of the coronavirus, rather than new non-performing loans.
Net interest income declined 17.7 per cent to HK$6.11 billion in the first half. Net fee and commission income increased 6.7 per cent to HK$1.44 billion in the first six months of the year. Its cost-to-income ratio worsened to 51.3 per cent in the first half, compared with 48.2 per cent a year earlier.
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