Here's why analysts are 'more constructive' on BEA's China operations

BEA will benefit from the Shanghai free-trade zone.

According to CCB International Securities, Bank of East Asia (BEA) hosted an investor day focusing on its China operations, in particular the opportunities and challenges facing the bank in China as it continues to establish itself as a “niche” player.

Significant attention was given to Corporate Banking, BEA’s “bread and butter” there, as well as new initiatives in cross-border and supply chain financing given the growing prevalence of renminbi internationalization.

Here's more from CCBI:

· Key takeaways. (1) The mainland cost-to-income ratio is likely to trend lower (from 47.9% at 1H13 ex. business tax) as incremental investment in the branch network begins to slow;

(2) While no specific targets were given, management aims to increase ROE (currently 9%) to low double-digits within 2-3 years. Retained earnings are currently insufficient to cover growth and as such, BEA China needs to be partly subsidized by the group;

(3) Management does not consider rate liberalization a big threat to profitability as most lending is already conducted above floor level and a significant portion of deposits are funded at market rates (structured deposits); and

(4) Asset quality should remain better than peers though the normalization process continues for the entire sector.

· Outlook. We are becoming more constructive on the bank’s China operations as the decline in costs going forward should more-than-offset higher loan provisions.

BEA stands to benefit from the upcoming enactment of the Shanghai free-trade zone and the growing opportunities in cross-border financing.