Bank of East Asia Profit Drops 38% as China Drags on Lending

  • Weaker China economy causes loan impairments to surge 60%
  • Lender’s shares reverse earlier gains after earnings

Bank of East Asia Ltd., the Hong Kong lender facing pressure from Paul Singer’s Elliott Management, said first-half profit dropped 38 percent as China’s slowing economy dragged on lending and caused loan impairments to surge. The shares fell the most in two weeks.

Net income fell to HK$2.1 billion ($270 million) for the six months ended June from HK$3.35 billion a year earlier, the company said in a statement to the Hong Kong stock exchange on Friday. Impairment losses on loans climbed 60 percent to HK$1.24 billion as profit at its China business slumped 56 percent, it said.

“The banking sector in mainland China continues to be challenged in this environment by slowing loan growth, compressed net interest margins, and increased default risk,” the company said in its statement. “BEA China has not been immune to these trends.”

Bank of East Asia’s margins have suffered in China after the central bank cut interest rates to bolster an economy growing at the slowest pace in a quarter century. Rising bad loans on the mainland add to challenges facing Chairman David Li at a time when he’s facing a legal petition from Elliott that claims BEA has diluted minority investors and entrenched management control.

BEA shares dropped 2.4 percent to HK$32.65 as of 3:12 p.m. Hong Kong time, compared with a 0.9 percent gain as of the city’s midday trading break, when the results were released. The stock has gained 56 percent from a seven-year low reached in February, when Elliott called on the bank to explore a sale of itself. The hedge fund also voiced concerns about Li’s re-election as chairman and a board mandate to sell shares.

At a briefing with reporters following the earnings, Li said Elliott’s allegations were “baseless” and the hedge fund’s actions weren’t in the interests of BEA’s shareholders. The petition filed by Elliott on July 18 would have no “material adverse impact” on the bank’s business and operations, Li said, adding that the bank will “vigorously oppose” the action. The first court hearing is scheduled for Sept. 21.

“This is yet another attempt to put the bank into play and force a sale,” he said. “We have heard Elliott’s arguments before. Their tactics only seek to serve their own short-term self-interest.”

Li spoke at the briefing along with BEA executives including his sons Adrian and Brian, who are both deputy chief executive officers.

Brian Li said he was “cautiously optimistic” on nonperforming loans in China, though it was hard to say if the worst was over. The bank’s impaired-loan ratio increased to 1.23 percent at the end of June from 1.13 percent as of Dec. 31, with the ratio for the China operation jumping to 2.8 percent from 2.63 percent, according to BEA’s earnings statement.

BEA will continue to consolidate its outlets in China and expects to reduce its network by a further five sub-branches by the end of the year, David Li said. The bank had already achieved 23 percent of the HK$700 million of cost savings it’s targeting by the end of 2018, he said.

Other key first-half figures reported by the lender:

  • Outstanding loans for BEA China dropped 2.3 percent from a year earlier
  • BEA China’s net interest margin sank to 1.61% from 1.95% 
  • Bank’s overall NIM dropped to 1.59% from 1.71%
  • Net interest income fell 11% to HK$5.48 billion
  • Net fee income dropped 21% to HK$1.3 billion

“The business and operating environment is expected to remain challenging in the second half of 2016,” BEA said.

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