Uncertain macro outlook leads to Bank of East Asia stock rating cut at Jefferies

On Monday, Jefferies adjusted its stance on Bank of East Asia (23:HK) (OTC: OTC:BKEAY), downgrading the stock from Buy to Hold and reducing the price target to HK$10.00 from the previous HK$11.50. The revision comes after the bank's first-half 2024 results, which were reported to align with expectations.

The firm noted that Bank of East Asia's conservative provisioning appears adequate at this stage. However, the potential for a return on equity (ROE) recovery for the bank is being overshadowed by an uncertain economic forecast. Despite the downgrade, Jefferies sees limited downside risk for the bank's shares at present.

The analyst from Jefferies suggested that while immediate prospects for a significant re-rating of the stock are unlikely, investors should keep an eye on Bank of East Asia. The cautious outlook reflects the broader challenges faced by the financial sector amid global economic uncertainties.

The price target adjustment to HK$10.00 signifies a more reserved expectation of the bank's stock performance shortly. The hold rating indicates that Jefferies does not currently see compelling reasons for investors to increase their holdings in Bank of East Asia.

The comments from Jefferies highlight the importance of monitoring the stock's performance, especially given the current economic climate. Investors are advised to take note of the changes in ratings and price targets as they reflect the evolving market conditions and sentiment toward the bank's financial health and prospects.

In other recent news, UBS has downgraded the Bank of East Asia's stock from Buy to Neutral, lowering the price target to HK$10.50 from HK$12.00. This decision follows UBS's review of several factors that could affect the bank's financial performance, including the Hong Kong Interbank Offered Rate (HIBOR) weakness, potential Federal Reserve rate cuts, and subdued loan demand.

The bank's rising non-performing loan (NPL) risks, particularly those associated with its Hong Kong commercial real estate exposure, have also contributed to this downgrade.

The bank's NPL risk is projected to be a significant uncertainty for future earnings. Despite potential policies to mitigate NPL risk from mainland commercial real estate exposure, credit costs are expected to remain elevated through 2024-25. As of the end of 2023, property development and investment loans made up 5.4% and 9.4% of the bank's loan portfolio, with collateralized ratios of 59.4% and 92.4%, respectively.

UBS has noted that the high interest rate environment, along with local banks' stricter lending criteria for Hong Kong commercial real estate, could increase liquidity stress for highly leveraged small developers. The firm emphasizes that the developments in the Hong Kong commercial real estate market and NPL trends are key risks that should be closely monitored.

These are among the recent developments for the Bank of East Asia.

InvestingPro Insights

Adding to the analysis by Jefferies, the InvestingPro data suggests that Bank of East Asia (OTC: BKEAY) is trading at a compelling Price / Book multiple of 0.23, which could indicate the stock is undervalued relative to its book value. This aligns with the conservative stance noted by Jefferies, as the bank's solid foundation may offer some degree of protection in uncertain economic times. Additionally, despite a decline in revenue growth in the last twelve months by -6.32%, the company has maintained its dividend payments for an impressive 33 consecutive years, which could be a reassuring factor for income-focused investors.

InvestingPro Tips further reveal that analysts predict Bank of East Asia will be profitable this year, continuing a trend as the bank has already been profitable over the last twelve months. This profitability, coupled with a P/E Ratio (Adjusted) of 8.29 as of Q2 2024, presents a potentially attractive opportunity for value investors. For those interested in a deeper dive into Bank of East Asia's financial health and future outlook, there are additional InvestingPro Tips available at: https://www.investing.com/pro/BKEAY

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