On Friday, UBS downgraded Bank of East Asia (23:HK) (OTC: OTC:BKEAY) stock from Buy to Neutral and lowered the price target to HK$10.50 from HK$12.00.
The revision follows UBS's assessment of several factors that could impact the bank's financial performance, including the Hong Kong Interbank Offered Rate (HIBOR) weakness, potential Federal Reserve rate cuts, subdued loan demand, and rising non-performing loan (NPL) risks associated with the bank's Hong Kong commercial real estate exposure.
The bank's NPL risk is anticipated to be a significant uncertainty for future earnings. While policies may help mitigate NPL risk from mainland commercial real estate exposure, credit costs are expected to remain high through 2024-25.
As of the end of 2023, property development and investment loans constituted 5.4% and 9.4% of the bank's loan portfolio, with collateralized ratios of 59.4% and 92.4%, respectively.
The high interest rate environment, coupled with local banks' stricter lending criteria for Hong Kong commercial real estate, may increase liquidity stress for small developers that are highly leveraged. UBS notes that the developments in the Hong Kong commercial real estate market and NPL trends are key risks that should be monitored closely.
InvestingPro Insights
In light of UBS's recent downgrade of Bank of East Asia, closely examining the financial metrics and market performance becomes even more pertinent. The InvestingPro data indicates that the bank is currently trading at a low Price/Book multiple of 0.24, which could suggest undervaluation relative to its book value. Furthermore, with a P/E Ratio of 7.58 and an adjusted P/E Ratio over the last twelve months of 7.34, the bank appears to be trading at a lower earnings multiple compared to some industry peers. Despite concerns about its NPL risks and the challenging environment for Hong Kong commercial real estate, the bank has maintained dividend payments for 33 consecutive years, which may appeal to income-focused investors. Additionally, analysts predict that Bank of East Asia will be profitable this year, supported by the fact that it has been profitable over the last twelve months with a reported revenue growth of 7.84%.
For investors seeking a more comprehensive analysis, there are additional InvestingPro Tips available for Bank of East Asia. These insights delve deeper into the bank's financial health and market predictions, providing a valuable resource for informed decision-making. Interested readers can take advantage of a special offer using the coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription, which includes access to these valuable tips and more.
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