Bank of East Asia Says China Rate Cuts Weighed On Results

Bank of East Asia's overall net profit up 39%

- Bank of East Asia saw Chinese loan quality deteriorate last year

- The bank's China unit posted a mild drop in pretax profit as interest margins narrowed

HONG KONG--Hong Kong's Bank of East Asia Ltd. (0023.HK) said Tuesday profit at its mainland China operations fell slightly last year as Beijing's interest rate cuts ate into its margins.

The fifth-largest local lender in Hong Kong has the largest China exposure among its peers and is the second-largest foreign bank in China with more than 100 outlets in the country, just after HSBC Holdings PLC. Though its overall net profit rose 39% thanks to buoyant financial markets, its thinner margins in China were accompanied by a rise in bad debt, reflecting the risk of deteriorating credit quality in the world's second-largest economy.

"Interest margins in China were challenging last year, because the People's Bank of China cut interest rates and injected liquidity into the banking system," said Brian Li, Bank of East Asia's deputy chief executive. Mr. Li said interest margins started to stabilize at the end of last year.

Pretax profit at the bank's China unit fell 5% to 2.25 billion Hong Kong dollars (US$290 million) in the year ended Dec. 31, from HK$2.37 billion in 2011. During the same period, the bank's impaired loans in China doubled to HK$453 million from HK$216 million, while loans overdue by more than three months jumped to HK$375 million from HK$21 million.

Mr. Li said the bad loans were concentrated in Zhejiang province, where unpaid loans surged last year. Wenzhou, a city in the eastern Chinese province that is home to many export-oriented businesses, was particularly hard hit by weakening global demand.

"Bad loans might still be popping up in the first half of this year. But it is well under control and won't cause material problems to the bank," he said.

Banking analyst Daniel Tabbush at the Tabbush Report said Bank of East Asia's bad loans rose 44% in the second half of last year compared with the first half. "(That) confirms the worsening credit metrics in China," he said.

The bank said its impaired loan ratio rose to 0.27% in the six months ended December, from 0.18% during the first half of 2012.

Bank of East Asia's net profit last year jumped 39% to HK$6.06 billion from HK$4.36 billion a year earlier, as rosier equity and bond markets drove its gains from trading and financial assets. The result was above the average HK$4.94 billion forecast of 11 analysts polled by Thomson One.

Spanish lender CaixaBank S.A. owns 16.38% of Bank of East Asia, while Guoco Group Ltd., a conglomerate controlled by Malaysian tycoon Quek Leng Chan, has a 14.34% stake. Japan's Sumitomo Mitsui Banking Corp. also owns 9.5% of the Hong Kong lender.