Company overview

Bank of East Asia by, the largest family owned bank in HK by market capitalization, focus to the development of the China market with a huge branch network.

FY 2011 summary

- Net interest income was slightly higher than our expectations, to HK $ 9.263 billion, up 22.8% yoy

-Net fees and commission income were slightly lower than we expected, to HK $ 3.342 billion, an increase of 13.6 % yoy

-Investment portfolio and trading recorded a loss of HKD 471 million

-Overall non-interest income fell to 34.53 billion, down 3.7% yoy

- Operating expense rose to 7.992 billion, up 15.8 % yoy

FY 11 results of the Bank of East Asia meet market expectations, the core business performed well, net interest income was slightly higher than our expectations, to HK $ 9.263 billion, up 22.8 % yoy. Net fee and commission income were slightly lower than we expected, to HK $ 3.342 billion, an increase of 13.6% yoy. However, due to the sovereign debt crisis in Europe, during the period, financial portfolio and trading activities recorded a loss of HKD 471 million, which directly led to the overall non-interest income fell to 3.453 billion, down 3.7 % yoy. Coupled with continuous investment in BEA China, operating expenses rose to 7.992 billion, up 15.8 %, and cost-effectiveness rate of 69.65%.

We expect the profit contribution of the BEA China will continue to rise, in the FY 11 annual result, operating profit before provision increased by 65.9 % yoy, coupled with the synergies effect with China the Retail and Commercial Banking business will become the Group's profit growth momentum.

In FY 11 core capital adequacy ratio and capital adequacy ratio of BEA were 9.4% and 13.7% respectively, due to the group is continuing invest in China, the capital requirements will continue. Meanwhile, with the Basel III will be implemented in 2013, We believe that the dividend per share for the FY 12 and 13 are facing downward pressure and a need for raising capital. Present value of the group is fair to investment in the long run, , the target price Maintain in $31,with the rating of "neutral".

Net Interest Income

From the figure above the Bank of East Asia's net interest income continued to rise, and the net interest margin continued to improve, vast network of the Group in China brought synergies effect to the Group, in particular, loans and trade bills corporate customers on the Mainland business growth is more obvious, about 21% growth yoy. Because of lower financing costs in HK, and the short-term macro-control will continue in China, we believe that corporate lending and related business is growing.

Net fee and commission income

Net fee and commission income were slightly lower than we expected, to HK $ 3.342 billion, an increase of 13.6% yoy. As we expected, business services and trade finance business still accounts for a considerable share, yoy increase of 14.4% and 62.1% respectively. Securities and brokerage commission income decreased, due to the market conditions of the second half of 2011 turmoil, turnover declined, the related commission income fell to 385 million, down 15.7 %. We believe that market turnover will be improved with the debt crisis in Europe is slightly released.

Loan to customers

Property-related loans is accounted over 50% of total loan portfolio, loans to customers in China increased by nearly HKD 18 billion, we estimated that with the group continue to expand business in China, the loans and advances to customers in China in 2012 will exceed HK's customers Impairment in East Asia by the end of 2011 amounted to 9 basis points, up 2 basis points which reflect the asset quality has deteriorated.

Dividend Policy

Dividend policy, BEA payout ratio of nearly 50 % but with the Basel III will be implemented in 2013, and BEA will invest more in China business. We believe that the dividend per share within the FY 12 and 13 is facing a downward pressure, and the need for raising capital. The management said it would give priority to raising the efficiency of the internal source by selling non-core assets and streamlining of business structure, reduce expenses and improve operational efficiency.

Peer Comparison

According to Bloomberg, the efficient ratio of group is the second highest in industry, reflecting the rising operating expenses in China. We expect the efficiency ratio of FY 12 and 13 began to fall ,due to the rise in China's profit contribution to the group will increase, and net interest margin downward pressure also will be relieved.

For the proportion of business in China with industry, its price-earnings ratio is also highest in the same industry, price-earnings ratio of 14 times, to reflect its fair value.

Due to the weighting of China business is high, its price-earnings ratio is also highest in the industry, 14 times P/E, is reflecting its fair value

Valuation

Current price is reflecting 1.3 times P/E which close to the five-year average of 1.5 times, due to the business prospects in China, the Group this should be able to enjoy a higher valuation, but the Group's cost-effectiveness ratio higher than its peers, as well as its core capital adequacy ratio low in the same industry, so we give “neutral “ rating, target price of $31. Investors are advised to wait.

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