HONG KONG -- Struggling to keep its head above the water, Hong Kong's last family-run lender Bank of East Asia has unveiled details of its cost-control measures while slashing dividends and dispensing more of its assets.
"We initiated a three-year cost-saving plan at the beginning of this year, targeting a gross saving of $700 million Hong Kong dollars ($90.3 million) by the end of 2018. We have achieved 23% of this target to date," David Li Kwok-po, Bank of East Asia's chief executive, told reporters on Friday. "Doing more with less is now part of the culture at BEA," said Li.
Of the total target savings, which amounts to 8% of its costs in 2015, 40% will be realized through business realignment, 25% through mid-and-back office restructure, and the remaining via branch streamlining and digitalization. The bank did not rule out further staff retrenchment.
In early June the bank shed about 180 jobs and shut down all its 22 securities retail outlets. It also reduced 3.6% of its Hong Kong network by floor area, and merged five sub-branches on the mainland.
Resolute on stopping operating expenses from growing at all this year, the bank will further downsize its mainland network by closing another five sub-branches, and shrink 11% of its total footprint across Hong Kong. Its total network in its home city is expected to contract by 22.5% over the next three years. As of June Bank of East Asia's cost-to-income ratio stood at 59.4%, up 7.4 percentage points from a year ago.
Meanwhile, it is planning to divest its 75.61% interest in Tricor Holdings, a global back-office services provider, together with NWS Holdings, the infrastructure and service management arm of New World Development, and affiliate of Chow Tai Fook Jewellery Group. The deal followed its sale of wholly-owned subsidiary Tung Shing Holdings, a local securities firm, and its wealth management business in Taiwan to Taiwan-based SinoPac Financial Holdings last October.
The announcement followed the bank's marked profits decline during the six months ended in June. Its bottom line skidded 37.5% on the year to HK$2.10 billion, or HK$0.69 earnings per share. Annualized return on equity fell to 4.8% from 8.7%, as net interest income, fees and commission, and investment returns fell across the board, with soured loans mounting up.
"We'll try our best to boost our ROE in spite of the adverse economic conditions," said Li. "But I don't have a target to disclose yet." His son Brian Li Man-bun, the bank's deputy chief executive, suggested the many opportunities in mainland China could perhaps help improve the bank's position given its considerable presence in the country.
"Although the current liquidity condition has held yields compressed, various new-economy industries provide favorable lending opportunities," noted Brian Li, citing logistics, environmental services, and healthcare as some areas that are growing remarkably amid China's "critical transformation." Treasury sales, which the Bank of East Asia has long overlooked, was another area to work on, he added.
The bank is also looking to attract more wealthy mainlanders as private banking customers. "Our asset under management among wealthy mainlanders rose 7.6% [in the past six months], versus the 1.4% average growth," said Adrian Li Man-kiu, the bank's other deputy chief executive. "Income from mainlanders among the private banking segment has already rose to 44% from 39% previously."
But Brian Li remains concerned about the bank's deteriorating asset quality and its pressure on the balance sheet. Impairment losses on loans and advances jumped nearly 60% to HK$1.24 billion compared to a year ago. The non-performing loans ratio edged up 10 basis points to 1.23% from the end of December.
The same ratio for its mainland arm rose by 17 basis points to a record 2.8% , and by 15 basis points to 0.49% for the Hong Kong operation. The bank said the sudden devaluation of the yuan last August had worked against the currency hedges of some clients, and caused them to default.
"It's hard to say that the worst time has passed," said Brian Li. "Credit costs in the second half will likely stay higher than usual." But he was positive on the deceleration of impaired loan formation at the bank's mainland operation, which had moderated to 1.45% from the peak of 3.2% in the same period last year.
In July New York-based hedge fund Elliot Management, which has built a 7% stake in Bank of East Asia over time and repeatedly pressured the bank to sell itself, requested that the family-held lender release its two strategic partners, Spain's Criteria Caixa and Japan's Sumitomo Mitsui Banking Corporation, from all contractual undertakings. That includes restricting them from freely increasing or decreasing their shareholdings.
"We won't dissolve the agreement," stated David Li, saying that the contract is meant to prevent the bank's share price from being sold down in a disorderly fashion by speculators. "Both Criteria and SMBC are positive about our platforms in Southeast Asia, as well as our management, or they would not partner with us," said Li. "We benefit from one another in terms of business referrals. That benefits all shareholders."
Li said that Elliot Management's move is "yet another attempt" to force a sale and "serve their own short-term self-interest." He emphasized that the hedge fund's petition "will not have any material adverse impact on the normal business and operations of the bank."
The bank cut its interim dividend per share to HK$0.28 from HK$0.38 a year ago, notwithstanding the upward revision of its payout ratio to 40.7% from 31.2% during the same period.
Bank of East Asia's Hong Kong-listed shares closed down 2.99% at HK$32.45 on Friday after the results announcement, paring back this year's gain to 12.45%. The benchmark Hang Seng Index rose 4.67% during the same period.