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DBS Group Research Summary: Equity Analysis of BEA (2014)

Core Content

This report provides an equity analysis of BEA (Bank of East Asia), a major Hong Kong bank, focusing on its financial performance, valuation, and future outlook. The report was issued on 19 February 2014, and the price target is set at HK$33.40 for a 12-month period, with the previous target being HK$31.25. The recommendation is HOLD, despite the bank's positive 2013 results.

Key Financial Performance Highlights

• 2013 Net Profit: HK$6.61 billion, which was 4% above the DBS Vickers forecast and 8.4% above the market consensus.
• EPS Growth: 2% for 2013, but core earnings grew by 14.6% when excluding property and disposal gains.
• DPS (Dividend per Share): Full year 2013 DPS was HK$1.11, with a final DPS of HK$0.68.
• ROE (Return on Equity): 10.4% for 2013, slightly lower than the previous year's 10.9%.
• ROA (Return on Assets): 0.87% for 2013, reflecting a decline in asset performance.
• NIM (Net Interest Margin): Increased to 1.90% in 2013, driven by higher money market rates in China, but is expected to flatten in 2014 due to rising funding costs.

Key Assumptions and Forecasts

• Earnings Revisions: FY14–15 EPS estimates were revised up by 6–9% due to improved NIM assumptions.
• PPOP (Provision for Overdue Loans) Growth: Expected to normalize at 20% in 2013, but will decelerate to 12% in 2014.
• ROE Projection: Limited to around 10% in 2014–2015 due to expected increases in funding costs and loan provisions.
• P/BV (Price to Book Value): The current P/BV is fair, and the bank's P/BV is expected to remain slightly over 1x in the short term.
• Dividend Yield: Expected to increase to 3.6% in 2014 from 3.4% in 2013.

Funding Cost Risk and Sector Outlook

• Funding Cost Challenge: The key challenge for the sector in 2014 is rising funding costs due to QE tapering and potential deposit rate liberalization in China.
• NIM Peak: The report suggests that NIM has peaked in the near term and may decline in 2014.
• Recommendation: Maintain HOLD on BEA, as its ROE is limited and funding costs may reverse the NIM improvement seen in 2013.
• Preference for Large Caps: The report prefers large-cap banks such as BOCHK and HSB for their stable funding base.

Peer Comparison

Valuation and Discount Model

• Dividend Discount Model (DDM): The present value of terminal value is HK$26.6, with a total value of HK$33.4.
• Terminal Value (2020): Estimated at HK$42.9 based on a P/BV of 1.05 and a cost of equity (COE) of 10.0%.
• Book Value per Share: Expected to grow from HK$25.74 in 2012 to HK$30.72 in 2014 and HK$40.7 in 2020.

Capital and Asset Quality

• CAR (Capital Adequacy Ratio): 15.9% in 2013, with a slight decline to 15.3% in 2014.
• Tier-1 CAR: 12.1% in 2013, expected to fall to 11.8% in 2014.
• NPL (Non-Performing Loans): Increased to HK$1.581 billion in 2013, with an NPL ratio of 0.39%.
• NPL Provision Coverage: Declined to 64.6% in 2013, indicating a potential drag on profitability.

Summary of Key Views

• BEA is the fifth-largest bank in Hong Kong by total assets.
• The bank's 2013 results were positive, with net profit exceeding forecasts due to NIM improvement.
• However, future earnings are expected to be limited by rising funding costs and loan provisions.
• The P/BV ratio is expected to remain around 1x, and the report maintains a HOLD recommendation.
• The report favors larger banks with a more stable funding base.
• The report suggests that the bank's upside potential is limited, and the price target reflects a DDM-based valuation.

Conclusion

The report highlights BEA's strong performance in 2013 but warns of potential challenges in 2014 due to rising funding costs and loan provisions. While the bank's earnings have improved, its ROE is expected to remain constrained. The HOLD recommendation is maintained, and the price target is adjusted upward to HK$33.40, reflecting the bank's fair valuation and expected performance.