Bank of East Asia cut its exposure to China’s troubled commercial property sector last year

The lender’s non-performing loans in mainland China dropped by 0.47 percentage points to 2.68 per cent at the end of 2023 compared with the first half
BEA’s net profit dropped 5.5 per cent to HK$4.12 billion for the whole of 2023, missing the HK$5.53 billion expected by analysts

Banking & finance

Aileen Chuang

Published: 5:15pm, 21 Feb 2024

Why you can trust SCMP

Bank of East Asia, Hong Kong’s largest family-owned lender, said its non-performing loans ratio in mainland China dropped by 0.47 percentage points to 2.68 per cent at the end of 2023 compared with the first half, as its overall exposure to troubled Chinese property developers shrank.

The bank’s debt in the country’s commercial real estate sector has come down to 7.7 per cent of total lending, just over half what it was two years ago, and is expected to continue downwards. Yet BEA still made significant provisions for bad loans.

“We continued efforts to improve asset quality, notably exposure to the Chinese commercial real estate sector, including both state-owned and foreign enterprises,” said co-chief executive Adrian Li in a teleconference about BEA’s financial results on Wednesday.

Another 1 per cent decrease in the proportion of commercial property debt can be expected in the next year, the bank said.

“Falling sales and refinancing difficulties have continued to present challenges to mainland developers,” Li said. “With further downgrades, additional provisions were made in the second half. Full-year impairment losses on financial instruments reached HK$5.5 billion (US$ 700 million).

04:49

Anger mounts as China's property debt crisis leaves flats unfinished

“Some 82 per cent of these provisions were related to the Chinese [commercial property] sector.”

The bank took a proactive approach to extending more loans covered by collateral in the past year, especially in high risk sectors.

“The group’s coverage ratio without collateral declined to 35.8 per cent from 50.4 per cent at 2022 year-end,” said Dawn Tao, BEA’s chief financial officer. “A few of our new impact loan accounts in 2023 are collateralised. So significant provisions were not necessary.

“Loans with higher uncertainties over repayment were written off. The remaining loans in our portfolio have lower coverage, but better recoverability prospects.”

Meanwhile, the bank’s exposure to Hong Kong’s commercial real estate sector decreased to 13.7 per cent of the group’s total loans, from 14.5 per cent in the previous year.

“We are very selective in extending new loans to the sector under current market conditions,” said Tao. “Average loan to value ratio is around 50 per cent. And our collateral is diversified across various property types. We are satisfied with the buffer for this exposure, even under stressed conditions.”

BEA’s net profit dropped 5.5 per cent to HK$4.12 billion for the whole of 2023, from HK$4.36 billion the previous year, missing the HK$5.53 billion expected by analysts polled by Bloomberg.

“Excluding two extraordinary items booked in 2022, namely the gain recorded on sale of our insurance subsidiary and the one time shared profit from an associate, profit before tax would have recorded a 74.6 per cent year-on-year increase,” Li said.

BEA benefited from widened margins thanks to the high interest rate environment. It hopes to maintain growth by diversifying revenue sources, developing cross-border business and enhancing operational efficiency.

It announced an additional HK$500 million budget to continue its share buyback programme, which started in the second half of 2022.

BEA is betting on Hong Kong’s expanding role in the Greater Bay Area to tap the growing affluence and potential for wealth management in southern China. Last month, the bank opened its 18-storey BEA Tower in the Qianhai special economic zone in Shenzhen.

The new office building, with a gross floor area of 460,000 square feet, houses the bank’s Qianhai branch and also a fintech innovation centre called Beast – which refers to BEA and start-ups – that supports innovative companies in Qianhai and Shenzhen.

Post