- Hong Kong's largest independent bank earlier warned it expected 'significant post-tax impairment losses' because of downgrade of mainland commercial loans
- Lender warns protests could hurt consumer, business confidence
The Bank of East Asia (BEA) warned on Wednesday that protests and civil unrest in Hong Kong over the past two months, combined with an escalation of the US-China trade war, could begin to weigh on the city's economy as it reported a nearly 75 per cent drop in its first-half profit.
The warning came days after Hong Kong's government cut its forecast for economic growth to between zero and 1 per cent in 2019 and Morgan Stanley said it expected the city's economy to contract this year.
In June, Hong Kong's largest independent and locally headquartered bank said it expected to record "significant post-tax impairment losses" in the first half as a result of downgrade of four "legacy" loan assets in mainland China because of worsening market conditions that weighed on the commercial property sector in non-tier-1 cities. The bank said on Wednesday the loans were made to privately owned enterprises and related to shopping malls and offices.
BEA, whose business is focused on Hong Kong and mainland China, reported a profit of HK$1 billion (US$127.4 million) in the first six months of 2019, compared with a profit of HK$3.99 billion in the prior-year period.
After a provision for impairment losses, the bank's mainland business reported a loss attributable to owners of the parent company of HK$2.85 billion.
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The bank's stock fell 1.9 per cent to HK$20.80 as of 3:30pm, after the announcement.
"Going forward, the performance of the Hong Kong economy could be affected by the recent social unrest. The tense atmosphere is likely to weigh on consumer and business confidence, and on inbound tourism, if there is no resolution soon," the bank said. "Given the external and domestic uncertainties, the performance of the Hong Kong economy is likely to be constrained through the end of 2019."
The lender said that its net charge for impairment losses rose to HK$5.06 billion in the first half largely due to downgrades of four loans with a nominal value of HK$6.2 billion. That compared with a charge for impairment losses of HK$282 million in the prior year period.
BEA said its impaired loan ratio worsened to 1.63 per cent at the end of June from 0.70 per cent at the end of June 2018, driven by the legacy loan downgrades.
"Credit quality has deteriorated in the mainland, which has made it very challenging for certain customers, particularly in the property sector in non-Tier 1 cities," Adrian David Li Man-kiu, co-chief executive, said at a press conference. "We have made adequate provisions to manage the asset quality situation in the mainland."
His brother Brian David Li Man-bun, also co-chief executive, said the bank had sought opportunities with private businesses in non-Tier 1 cities as part of its previous growth strategy, but has "proactively" moved to derisk its portfolio since 2018.
Corporate loans now make up two-thirds of its mainland loan portfolio, compared with 80 per cent 18 months ago, he said. In the property sector, the bank is now focused exclusively on top tier sponsors and cities, he said.
The challenging results came after their father David Li Kwok-po announced in March that he would step down as chief executive, but said he would remain as the bank's executive chairman. The elder Li's retirement is the latest in a wave of city's tycoons to give way to the next generation.
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Moody's Investors Service said in a research report in June that the profit warning highlighted "exposures to large single borrowers in the bank's mainland business"
"In our opinion, the bank has made prudent provisions on these exposures and is unlikely to make any further sizeable provisions on these specific loans," Moody's said at the time.
Net interest income rose 18.5 per cent to HK$1.16 billion in the first half. Net fee and commission income increased 0.7 per cent to HK$1.37 billion in the first six months of the year.
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The family-run bank, which was founded in 1918, said its cost-to-income ratio improved to 49.1 per cent in the first half, compared with 48.7 per cent a year earlier.
In Hong Kong, the bank said that operating income in its corporate and commercial banking segment increased 2.5 per cent year-on-year. Operating income rose 11.9 per cent in its retail banking business.
"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 bank said. "As a trading hub, Hong Kong is caught in the middle, and cannot escape the fallout from the conflict. The situation for Hong Kong is further complicated by social unrest."
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