Bank of East Asia's net profit predicted to drop 12% to HK$2.6b

NIM gains to be modest.

According to CCB International, Bank of East Asia (BEA) will kick off earnings season for the Hong Kong Banks, reporting 1H13 results on 1 August 2013. We forecast first-half net profit of HK$2.6b (-12% YoY due to one-time gains in 1H12) and EPS of HK$1.15/share. 

Here's more:

We expect credit costs to continue to increase from low levels (8bp, +63% HoH to HK$143m) on continued China credit cost normalization. While NIM should improve sequentially in 1H13 (+3bp to 1.70%), the gains will be modest due to continued competition in the syndicated loan market.

The share price has remained largely flat since the bank’s first-half pre-close briefing statement in early June.

Asset quality remains the key factor. While we don’t deny that the bank’s China credit experience will likely be positive relative to the foreign peer bank group, the reality is that credit costs are likely to deteriorate as reflected in our group provision estimates (+40% for FY13/14).

This is both a function of slower economic growth on the mainland, as well as BEA engaging in higher yielding loans given the higher funding costs relative to large domestic players.

To put it bluntly, BEA’s larger relative exposure to mainland property loans means that the China macro landscape is going to be the determinant of share-price performance for the foreseeable future.