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Nikkei Markets

Bank of East Asia flags risks to outlook as profit slumps

Expects second-half loan impairments to be higher than in the year-ago period

HONG KONG (Nikkei Markets) -- The Bank of East Asia on Wednesday said its impairment losses in China could be higher in the second half of 2019 than those recorded a year earlier as it cited risks to its outlook after reporting a slump in first-half profit.

The Hong Kong lender, one of the few foreign banks with an extensive footprint in China, booked impairment losses of HK$5.06 billion ($645 million) in the first half of the year, driven mostly by four "legacy" loan assets. Those assets, with a nominal value of HK$6.2 billion, were affected by the impact of worsening market conditions in cities outside the mainland's largest metropolises.

Co-Chief Executive Officer Brian Li told reporters in Hong Kong that the lender has already proactively downgraded loans in China, with enough provisions coverage to offer a cushion, and that a lowered risk appetite has led the bank to reduce exposure to developers since 2017.

Li said the bank's impairment losses in the first half were an "isolated" incident and will not repeat in the second half. Still, impairment losses will be "slightly higher" in the half year ending Dec. 31 from the same period a year earlier, he said.

BEA had posted impairment losses of HK$283 million in the first half of 2018, and HK$1.59 billion for all of last year.

While it was too early to say if BEA's China operations will swing to a profit in the second half because of macroeconomic uncertainties in China, the bank was confident that its bottom-line during the July-to-December period will "improve a lot," Li said.

Brian Li, and older brother Adrian Li, were both appointed co-CEOs in July, succeeding their father David Li. The senior Li remains the lender's Executive Chairman.

The Sino-American trade war, which has dragged on for more than a year, mass protests in Hong Kong and the impending launch of operations by virtual banks in the former British colony were all cited by BEA among risks on the horizon.

Earlier in the day, BEA said its first-half net profit fell nearly 75% from a year ago to HK$1.00 billion, weighed down by the impairment losses in China. Net interest income rose 18.5% to HK$7.41 billion from HK$6.25 billion, while net interest margin increased to 1.90% from 1.70%.

The lender posted a net loss of HK$2.85 billion on its China banking operations during the first half, with impaired loan ratio rising to 4.89% from 1.73% at the end of 2018.

Established in Hong Kong in 1918, BEA opened its first mainland branch in Shanghai in 1920, and currently has outlets in 44 cities across China.

"The longer the US-China trade conflict continues to drag on, the greater the potential for further deterioration in the economic outlook for China," the company said in its outlook in the statement. "As a trading hub, Hong Kong is caught in the middle," with the situation further complicated by social unrest in the city, it added.

The bank had consolidated assets of HK$876.8 billion as of June end, a 4.4% increase from the end of 2018. Total advances to customers in the mainland stood at HK$198.2 billion as of June 30, while advances to Hong Kong customers were at HK$241.7 billion.

The lender believes its overall asset quality is "under control" and will focus on growing its branch network in tier-1 cities and the Greater Bay Area in China, Brian Li said.

For Hong Kong, meanwhile, the group has lowered its loan growth guidance to a range in the low- to mid-single digit percentages, from an earlier projection in a range of mid- to high-single digits, Co-CEO Adrian Li said. For the bank as a whole, loan growth for 2019 is expected to be in the single digits, he added.

The lender said the performance in Hong Kong could be weighed by the unrest as the "tense atmosphere" is likely to weigh on consumer and business confidence as well as inbound tourism, if there were no resolution soon.

BEA on Wednesday also said that the emergence of virtual banks and the development of non-bank financial technology solutions will challenge the business model of conventional banks. While funding costs may rise on the one hand as virtual banks compete for deposits, operating expenses for conventional banks may rise as they may be forced to invest in products and services to maintain their edge, it said.

The Hong Kong Monetary Authority, the city's de facto central bank, has issued eight virtual bank licenses since March, including to entities backed by some of China's biggest technology and financial companies such as Alibaba Group Holding, Tencent Holdings and Ping An Insurance Group. The virtual banks are expected to launch operations in a few months.

BEA said that the bank will in the time ahead seek to raise its core revenues by expanding its customer base and checking costs.

Shares of BEA fell 1.7% to HK$20.85 in Hong Kong on Wednesday, while the city's Hang Seng Index gained 0.2%.

-- Benny Kung & Lopamudra Bhattacharya

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