Why BEA's direct exposure to China is a 'double-edged sword'

It's struggling to generate good returns on its China business.

CLSA notes that BEA stands out from peers in having the most direct exposure to China. HSBC’s operations in the country may be larger in absolute size, but BEA’s are bigger relative to group profit at 30-40%, up from c.10% a decade ago.

However, this is a double-edged sword for BEA, adds CLSA, as signs of growing stress in the mainland banking system mean increasing risk, and it is struggling to generate good returns on its China business.

Here's more from CLSA:

Return on investment
While BEA is among the larger players in the second tier of Hong Kong banks, its key distinguishing feature is its success in growing organically on the mainland - the reward for several decades of assiduous cultivation and effort.

From a position a decade ago where the mainland represented around 8% of group revenue and 10% of profit, mainland China has grown to around 40% of revenue and 30% of pretax earnings.

Taking the rough with the smooth
However, as the relative struggles of its peers in achieveing similar penetration in the mainland have shown, growth has not been easy for BEA.

Indeed, it earns a lower ROA in its mainland operations than in Hong Kong, and this return profile has been deteriorating due to NIM compression. Unfortunately, this is coming at a time when the mainland banking industry faces building structural challenges that we think are likely to compress returns further.