An Interesting Play on China's Banking Sector: Bank of East Asia

| About: Bank of (BKEAY)
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In today's Wall Street Journal Asia print edition, Kate Linebaugh reports on a Hong Kong bank stock that is growing handsomely along side China's robust economic growth in HEARD IN ASIA: Lender's Ties to China Pay Off.

Bank of East Asia, also known as BEA, is Hong Kong's largest locally owned bank and over the past decade it has built out one of the largest non-locally owned banking networks in China with 27 branches and representative offices in 11 cities.

In the half-year period ended June 30th, BEA's pretax profit from China increased 80% to 285 million Hong Kong dollars (US$36.6 million). This accounted for 15% of total pretax earnings, which overall increased 32% to HK$1.8 billion. According to Merrill Lynch estimates, by 2010 as much as 35% of BEA's loans and 30% of its profit could come from China.

Although BEA is dwarfed in size by global banks such as Citi and HSBC, it was chosen as one of the first three banks allowed to make overseas investments for mainland citizens. BEA is also competitive in the sense that its matches HSBC's mainland presence of 25 branches in 13 cities. However, BEA is unique in terms of it deriving a significant portion of profits from China given its small size.

Comment: Bank of East Asia is listed in Hong Kong (code: 0023) and is one of 23 components of the benchmark Hang Seng Index. It also has ADRs traded on the Pink Sheets under ticker: (OTCPK:BKEAY). Daily trading volume can be rather thin with heavy volume every two weeks or so, thus its average 3-month trading volume of 110,000. I would advise using limit orders whenever trading Pink Sheets and stocks with thin volume.

BEA closed today at HK$34.60 ($4.45) and according to the article trades at about 15x earnings for the year, which is higher than most Hong Kong banks. It appears its China business is factored in its shares having gained 47% year-to-date versus 16% for the Hang Seng. However, Tracy Yu, an Asia banking analyst for Citigroup said:

"I am still positive on Bank of East Asia in terms of share-price performance, and one of the key reasons is China."

BEA's nonperforming loans in China are at 0.5% according to analysts which is significantly lower than an estimated 7.5% for China's commercial banks. A Merrill Lynch research report said:

"A key difference between BEA's loan growth and many of the local Chinese banks' in our opinion is the robustness of BEA's lending practices and credit-risk management."

Note that a Morgan Stanley research report warns that further interest rate increases in China could "have a detrimental effect" on BEA's yuan-based lending.

Resources:

Bloomberg.com detailed quote of BEA; BEA's investor relations website; Controlledgreed.com's tips on how to buy stocks listed on foreign exchanges