CICC: Maintains "Neutral" rating on BANK OF E ASIA (00023), raises target price to HK$18.03

CICC released a research report stating that BANK OF E ASIA (00023) has a clear new strategic direction, lowering credit costs and raising non-interest income related assumptions, raising 2026E/2027E net profit attributable to shareholders forecast by 42.5%/49.0% to 5 billion/5.7 billion Hong Kong dollars; raising 2026E/2027E operating income forecast by 6.3%/7.0% to 21.2 billion/21.9 billion Hong Kong dollars. The company is trading at 0.4x/0.4x 2026E/2027E P/B. The bank raised its target price by 28% to 18.03 Hong Kong dollars, corresponding to 0.5x/0.5x 2026E/2027E P/B and 27.5% upside potential, maintaining a neutral rating. Key points of CICC's view as follows: 2015 performance below the bank's expectations The company announced its 2015 performance: operating income of 21 billion Hong Kong dollars, YoY +0.2%; attributable ordinary shareholders' net profit of 3.2 billion Hong Kong dollars, YoY -20.1%. The company's performance was below the bank's expectations, mainly due to one-time factors affecting impairment of mainland joint ventures and Hong Kong own real estate, excluding these factors, the company's pre-tax profit YoY -5.6%. New three-year strategy: ROE to increase to 7% by 2028, doubling shareholder returns The company's ROE in 2015 was 3.1%, and its ROE level has been suppressed by operating efficiency and credit costs in the long term. In response to this, the company's specific strategic goals and guidance for 2026-2028 include: 1. Improvement in asset quality. By 2028, completely solve the problem of historical legacy asset quality of commercial real estate (CRE), with credit costs reduced to below 60bp; increase lending for non-commercial real estate, maintaining the proportion of related exposures at about 85% in the mid-term; 2. Sustainable revenue growth. Leveraging the advantage of cross-border business, 80% of future new credits will depend on the mainland business network; guidance for the next 3 years with a CAGR of about 14% for non-interest income, focusing on wealth management for affluent individual clients and relying on transaction banking and digital platforms for corporate clients; 3. Financial technology driving cost savings. Cumulative cost growth of less than 5% in the next three years. Continued disposal of non-performing real estate related assets The company's credit cost in 2015 was 1.04%, up only 1bp YoY; credit cost rose by 19bp to 1.14% QoQ in 2H15. The company disclosed that 77% of credit costs were used for disposals related to CRE exposures. As of the end of 2015, the company's exposure to mainland property developers accounted for 2.7% of total loans, down 2.2% YoY; exposure to Hong Kong property developers accounted for 9.9% of total loans, down 1.6% YoY. The company stated that most of the problem loans related to mainland CRE have been written off. There may still be a need for further impairment provisions for Hong Kong commercial real estate exposures in the future, but the impairment in 2015 was mainly due to changes in collateral values, not due to some customers defaulting. Annual spread decreases, stable asset deployment The company's net interest income decreased by 7.3% YoY in 2015, mainly due to the narrowing of the interest spread by 19bp to 1.90% due to the downward trend of HIBOR and mainland LPR; total loans/total assets grew by 3.1%/4.9% YoY respectively, indicating a stable and relatively fast expansion pace. The interest spread rebounded by 10bp to 1.98% QoQ in 2H15, mainly due to differences in the repricing cycles of deposits and loans, resulting from the downward adjustment in liability costs; total loans grew by 1.9% QoQ in 2H15, with a stable pace of credit deployment. Looking ahead, the bank expects a slight narrowing of the interest spread in 2026 due to the impact of US interest rate cuts, with the pace mainly reflecting in the second half of the year. The company stated that there has been a gradual recovery in medium to long-term credit demand in Hong Kong, combined with a relatively fast pace of deposit growth, the bank expects the pace of expansion to be slightly faster than this year. Non-interest income growth supports revenue The company's non-interest income grew by 28% YoY in 2015, with fee income increasing by 15% YoY, wealth management and corporate fee income growth both reaching double digits; other non-interest income grew by 50% YoY, with the company stating that the related income mainly came from client transactions and market making, belonging to stable income from fees rather than proprietary trading. Risk warning: Unexpected downturn in commercial real estate in Hong Kong, US Federal Reserve interest rate cuts exceed expectations.