CICC has issued a research report stating that Bank of East Asia (00023) has a clear new strategic direction. The report lowers assumptions for credit costs and raises those for non-interest income, while increasing forecasts for 2026E/2027E net profit attributable to ordinary shareholders by 42.5%/49.0% to HK$5.0 billion/HK$5.7 billion. Revenue forecasts for 2026E/2027E are raised by 6.3%/7.0% to HK$21.2 billion/HK$21.9 billion. The company trades at 0.4x/0.4x 2026E/2027E P/B. The target price has been raised by 28% to HK$18.03, corresponding to 0.5x/0.5x 2026E/2027E P/B and implying 27.5% upside potential, with a "Neutral" rating maintained.
Key points from CICC are as follows:
The 2025 performance fell short of expectations. The bank reported 2025 results: revenue of HK$21.0 billion, up 0.2% year-on-year; net profit attributable to ordinary shareholders of HK$3.2 billion, down 20.1% year-on-year. Performance was below expectations, primarily due to one-off factors including impairments related to mainland associates and Hong Kong self-owned properties. Excluding these factors, pre-tax profit declined by 5.6% year-on-year.
New three-year strategy: Targeting a return on equity (ROE) increase to 7% and a doubling of shareholder returns by 2028. The bank's ROE for 2025 was 3.1%, a level historically constrained by operational efficiency and credit costs. To address this, specific strategic targets and guidance for 2026-2028 include: 1. Improvement in asset quality. Aiming to fully resolve historical commercial real estate (CRE) asset quality issues by 2028, reducing credit costs to below 60 basis points; increasing lending outside of commercial real estate, with the medium-term target for such exposures maintained at approximately 85%. 2. Sustainable revenue growth. Leveraging advantages in cross-border business, with 80% of future new credit growth expected to rely on the mainland business network; guiding for a non-interest income compound annual growth rate (CAGR) of approximately 14% over the next three years, focusing on wealth management for affluent clients in the retail segment and transaction banking and digital platforms for the corporate segment. 3. Cost savings driven by fintech. Cumulative cost growth over the next three years is projected to be below 5%.
Ongoing disposal of real estate-related non-performing assets. The bank's credit cost for 2025 was 1.04%, up only 1 basis point year-on-year; the credit cost for the second half of 2025 increased by 19 basis points sequentially to 1.14%. The bank disclosed that 77% of the credit cost was allocated for the disposal of CRE-related exposures. As of the end of 2025, exposures to mainland property developers accounted for 2.7% of total loans, down 2.2% year-on-year; exposures to Hong Kong property developers accounted for 9.9% of total loans, down 1.6% year-on-year. The bank indicated that problematic loans related to mainland CRE have been largely written off. Further impairments on Hong Kong commercial real estate exposures may be required in the future, but the 2025 impairments were primarily due to changes in collateral values rather than customer defaults.
Net interest margin declined for the full year, while asset growth remained stable. The bank's net interest income for 2025 decreased by 7.3% year-on-year, mainly due to a 19 basis point contraction in net interest margin to 1.90%, caused by declines in HIBOR and mainland LPRs. Total loans and total assets grew by 3.1% and 4.9% year-on-year respectively, indicating steady and relatively rapid balance sheet expansion. The net interest margin in the second half of 2025 rebounded by 10 basis points sequentially to 1.98%, which is believed to be due to differing repricing cycles for deposits and loans, leading to a lagged decline in funding costs. Total loans grew by 1.9% sequentially in the second half, indicating stable credit deployment. Looking ahead, it is expected that the net interest margin will narrow slightly in 2026, influenced by US interest rate cuts, with the effect primarily manifesting in the second half. The bank noted some recovery in medium to long-term credit demand in Hong Kong. Combined with relatively strong deposit growth, balance sheet expansion is expected to be slightly faster than this year.
Growth in non-interest income supports revenue. The bank's non-interest income for 2025 increased by 28% year-on-year. Within this, fee income grew by 15% year-on-year, with both wealth management and corporate fee income achieving double-digit growth. Other non-interest income increased by 50% year-on-year; the bank stated that this income primarily came from client-driven transactions and market-making activities, representing stable, fee-like revenue rather than proprietary trading.
Risk warnings: Potential for a sharper-than-expected downturn in Hong Kong commercial real estate; possibility of the US Federal Reserve implementing larger-than-expected interest rate cuts.