Hong Kong-based Bank of East Asia Ltd., with a larger Chinese operation than its peers, benefited from China's cash crunch last year: Largely thanks to its China business, the city's largest family-run lender by assets Tuesday posted a record profit of 6.61 billion Hong Kong dollars (US$853 million), up 9% from the year before.
While the profit margin for BEA's core Hong Kong lending business was flat, its China operation's net interest margin–a gauge of lending profitability–raised analysts eyebrows by jumping to 2.29% from 2.15% in 2012.
The short-term interest rates that banks charge each other abruptly surged to multiyear highs in June and again in December, as Chinese authorities' efforts to tame the mounting risks of 'shadow banking' dried up liquidity in China's money market. Shadow lenders are a mélange of informal funding sources, from traditional banks' off-balance-sheet lending arms to trust companies, insurance firms and pawnbrokers.
The squeeze hurt smaller banks that rely heavily on interbank borrowing. China Everbright Bank Co., for example, in June defaulted on 6.5 billion yuan ($1.07 billion) in of interbank loans.
By contrast, their larger cash-rich counterparts, like Industrial & Commercial Bank of China Ltd.–the country's top bank by assets–were in a position to provide liquidity to smaller peers and so benefit from the soaring interest rates. Foreign banks, which have conservative balance sheets to meet regulatory requirements, are also net lenders.
BEA Tuesday became the first to pop its Champagne: Its China business last year posted a profit of HK$1.9 billion (US$245 million), up 16%.
Bank of East Asia has been more aggressive than its Hong Kong peers in mainland China, opening 128 outlets in 42 cities. Its results are often closely watched by analysts and peer banks to gauge China's banking environment.
Bad loans in its China business surged 85% to HK$840 million, and its nonperforming loan ratio jumped to still-low 0.49% from 0.27%.
Bank of East Asia is one of the city's three remaining family-owned lenders, which are under takeover spotlight again following the recent acquisition of Chong Hing Bank Ltd. by Chinese property conglomerate Yuexiu Group.
Asked whether the Li family, whose stake in the bank is estimated by analysts at 7.6%, is interested in selling, the senior Li said: 'It's all about shareholders' value. If someone offers three to four times of book value, I would consider.'
At the peak of financial boom in 2008, Chinese lender China Merchants Bank Co. paid US$2.47 billion, almost three times book value, for Wing Lung Bank. But Chong Hing went last October for HK$1.5 billion, a more modest 2.4 times book value, and Oversea-Chinese Banking Corp.'s last offer for Wing Hang Bank, at US$5 billion, was just 1.9 times book value.
BEA is now trading at 1.1 times its forecast 2014 book value.