20150727-法国巴黎银行-China_weighing_on_core_business_13页_413kb

Bank of East Asia (23 HK) Summary

Core Content

The report provides an analysis of Bank of East Asia (BEA) and its subsidiaries, focusing on the financial performance, valuation, and investment outlook for the period 2015-2017. The key conclusion is that the stock is downgraded from Buy to HOLD due to macroeconomic headwinds in China and the impact on BEA's profitability, despite improvements in cost efficiency and core banking performance.

Main Points

• Target Price: The updated target price for BEA is HKD32.80, a 12% decrease from the previous target price of HKD37.10.
• Earnings Forecast: Earnings for FY15 and FY16 are cut by 20% and 23% respectively, due to NIM compression (14bp/12bp) and credit cost hikes (11bp/13bp).
• ROE Forecast: The normalized ROAE for BEA (China) is reduced from 9.5% to 7.7% for FY15-17.
• Valuation: The valuation includes a core banking valuation and an M&A premium. BEA (China) is valued at 0.49x FY16E P/B, BEA (HK) at 1.2x FY16E P/B, and Corporate Services at 10x FY16E P/E.
• Downgrade Reason: The downgrade to HOLD is due to the fair valuation at 1.1x FY16E P/B, and the risk of sharp asset quality deterioration in the China portfolio.

Key Risks

• Downside Risk: Sharp asset quality deterioration in BEA's China portfolio could further hamper ROE and negatively impact the stock price.
• Upside Risk: An increased likelihood of BEA being an M&A target could provide an upside, with a 5% probability of M&A and a 2x multiple applied to the valuation.

Financial Performance and Trends

• NIM Compression: BEA (China) is expected to experience NIM contraction due to sector trends and lower yields.
• Credit Costs: Credit costs are expected to increase, with a forecast of 29bp/31bp for FY15/FY16, attributed to asset quality deterioration.
• Fee Income Growth: Strong fee growth from higher market turnover is expected to be a bright spot for BEA (HK), with a forecast of 25% growth in FY15.
• Loan Growth: Loan growth is expected to be low single-digit in FY15, with cross-border financing slowing due to narrowing rate differentials.

Key Financial Data

Investment Thesis

• The valuation is based on core banking valuation and M&A premium.
• Core Banking Valuation: HKD31.2, with BEA (China) at 0.49x FY16E P/B, BEA (HK) at 1.2x FY16E P/B, and Corporate Services at 10x FY16E P/E.
• M&A Premium: A 5% probability of M&A with a 2x multiple, contributing to the target price of HKD32.80.

Catalysts

• A sharp widening of cross-border rate differentials leading to a rebound in cross-border loan growth.
• An increased likelihood of BEA being an M&A target.

Company Background

• Founded in 1918 in Hong Kong, BEA is the largest independent local bank.
• Has over 88 branches in Hong Kong and a large network in Mainland China, established in 2007.
• BEA (China) is the first foreign bank to launch credit cards and issue RMB retail bonds.

Key Financial Projections

Summary of Risks and Opportunities

• Downside Risk: Sharp deterioration in asset quality in China.
• Upside Risk: Increased likelihood of M&A.
• Macro Headwinds: Impact on China operations due to economic slowdown and NPL formation.
• Fee Growth: Strong fee growth from higher market turnover is expected to offset some of the NII contraction in BEA (HK).

Conclusion

The report concludes that despite improvements in cost efficiency and ROA, macroeconomic headwinds in China will weigh heavily on BEA's profitability in the short term. The downgrade to HOLD reflects the fair valuation of the stock at 1.1x FY16E P/B and the potential for M&A as a key upside risk. The target price of HKD32.80 is based on a core banking valuation and a 5% probability of an M&A premium.