Bank of East Asia Strengthens Capital Base — Bond Yields Up to 5.7%!

• As interest rates declined, Bank of East Asia’s net interest income and margin fell from their peak. However, solid performance in non-interest income and lower credit impairment losses helped boost net profit.
• By actively restructuring its asset portfolio, improving collateral coverage, and reducing exposure to high-risk loans—especially those linked to China’s property sector—Bank of East Asia has significantly lowered overall credit risk. Its CET1 ratio rose to 23.7%, near the top of the industry, reflecting a strong and resilient capital structure.
• The bank’s USD-denominated bonds offer higher yield to maturity than most peers. Combined with its solid credit profile, these bonds present attractive investment potential worth investor attention.

Net Interest Income Eases from Peak, but Revenue and Profit Remain Resilient

Following rate cuts by the U.S. Federal Reserve in late 2024 and again in September and October this year, the Fed funds rate has trended lower. In parallel, Hong Kong’s 1-month HIBOR has also declined, creating a more accommodative interest rate environment (see Chart 1). Since most loans in Hong Kong are priced on a floating-rate basis, the 1-month HIBOR—widely used as a benchmark for short-term funding costs—plays a key role in determining banks’ interest income, especially for mortgage and corporate lending.

Chart 1: US Fed Funds Rate and Hong Kong 1-Month HIBOR

While HIBOR generally tracks U.S. interest rates, it briefly dipped below 2% in mid-2025. This was driven by a resurgence in Hong Kong’s IPO market, which attracted capital inflows, and by the Hong Kong dollar reaching its strong-side convertibility limit of 7.75 against the U.S. dollar. In response, the HKMA intervened by selling HKD, boosting the banking system’s aggregate balance to over HKD 100 billion—a post-pandemic high. More recently, as funding pressures returned and interbank demand increased, HIBOR has rebounded to around 3.6%, aligning more closely with the Fed funds rate of 4.1%.

Lower interest rates weighed on Bank of East Asia’s net interest performance, with its net interest margin narrowing by 22 basis points year-on-year to 1.88% in the first half of 2025. Net interest income also declined 11% to HKD 7.3 billion (see Chart 2). However, robust growth in investment income and rising commissions from third-party insurance sales lifted non-interest income by 29% to HKD 2.9 billion, helping total revenue hold steady at HKD 10.3 billion.

Chart 2: Bank of East Asia’s Revenue and Net Interest Margin

Bank of East Asia delivered a 14% year-on-year increase in net profit attributable to shareholders, reaching HKD 2.4 billion. This was supported by stable operating costs and a notable reduction in credit impairment losses.

The bank’s efforts to manage credit risk are worth highlighting. After peaking at HKD 6.2 billion in 2023, impairment losses have steadily declined to more manageable levels. In the first half of 2025, they fell further to HKD 2.5 billion, down 15% year-on-year (see Chart 3), reflecting an improvement in asset quality.

Chart 3: Bank of East Asia’s Credit Impairment Losses

Bank of East Asia’s loan book is primarily concentrated in Hong Kong and mainland China, accounting for approximately 45% and 35% of total loans, respectively. By sector, lending is focused on residential property purchases (21%), property development (13%), and financial institutions (13%).

The bank has actively reduced its exposure to China’s property sector. As of June 2025, mainland property-related loans accounted for just 4% of total lending, down from over 10% at peak levels (see Chart 4).

Chart 4: Bank of East Asia's Chinese Property Sector Loan Exposure

As non-performing loans in China’s property sector are gradually absorbed, credit losses from mainland operations have begun to ease. However, in Hong Kong, a slowing economy and softening property market have led to a slight uptick in non-performing loans (see Chart 5).

Chart 5: Bank of East Asia’s Non-Performing Loan Ratio and Distribution

Despite this, Bank of East Asia continues to maintain robust collateral coverage, with over half of its total loan portfolio secured. In Hong Kong, most loans are backed by residential or commercial properties, boosting the collateralized loan ratio to 76%. This strong asset backing supports higher recovery rates and helps contain overall credit risk. The bank’s non-performing loan ratio has edged down slightly—from a peak of 2.7% to 2.6%—indicating that asset quality remains stable.

Capital Strength Improves; Credit Metrics Remain Solid

As of June 2025, Bank of East Asia’s Common Equity Tier 1 (CET1) ratio rose sharply to 23.7%, up from its previous range of 16–18%. This places the bank near the top of the industry and well above the regulatory minimum of only 7.3%. Its total capital ratio also increased to 28.6%, underscoring a solid capital foundation and strong risk-bearing capacity (see Chart 6).

Chart 6: Bank of East Asia’s Capital Adequacy Ratios

This improvement reflects a combination of strategic portfolio adjustments and regulatory reforms. Bank of East Asia has actively rebalanced its asset mix, enhanced collateral coverage, and reduced exposure to high-risk lending—particularly in China’s property sector—resulting in lower overall credit risk.

In January 2025, Hong Kong officially implemented the Basel III Final Reform Package, which significantly lowered the risk-weighting of certain collateralized assets. This regulatory shift further amplified the impact of Bank of East Asia’s asset optimization strategy, driving a sharp reduction in total risk-weighted assets—from HKD 486.1 billion to HKD 368 billion—and substantially improving its capital adequacy and overall risk resilience.

On the liquidity front, Bank of East Asia’s Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) stood at 177% and 125%—comfortably above the 100% regulatory threshold. Together, these indicators reflect a healthy balance sheet and strong financial resilience (see Chart 7).

Chart 7: Bank of East Asia’s Liquidity Ratios

Bond Investment

The platform currently offers several bonds issued by Bank of East Asia, including senior non-preferred and Tier 2 bonds (see Table 1). The senior non-preferred bonds are rated BBB by S&P, while the Tier 2 bonds are rated BBB-, reflecting their lower repayment priority and relatively higher investment risk.

Table 1: Bank of East Asia's Senior Non-Preferred and Tier 2 Bonds Information

Given Bank of East Asia’s strong capital adequacy—well above industry averages—solid operating performance, and sound asset quality, we believe even its lower-ranked Tier 2 bonds offer good investment value. Notably, the “BNKEA 6.750% 27Jun2034 Corp (USD)” Tier 2 bond offers a yield of up to 5.7%, one of the more attractive returns among bank-issued bonds.

For investors who prefer higher-ranking instruments, the shorter-dated “BNKEA 5.125% 07Jul2028 Corp (USD)” senior non-preferred bond also offers a compelling 4.5% yield to next call (with about one and a half year remaining until the next callable date), making it a strong candidate for bank bond allocations.

It’s worth noting that five of these bonds include coupon reset features. If the issuer does not redeem the senior non-preferred bonds one year before maturity, or the Tier 2 bonds five years before maturity, the coupon will reset. Typically, Tier 2 bonds begin amortizing in the final five years before maturity, gradually reducing their capital contribution. As such, the likelihood of early redemption is generally higher for Tier 2 bonds than for senior non-preferred bonds—an important point for investors to note.

Related Risks

As central banks continue to cut interest rates, the downward trend in rates is expected to further compress net interest margins, putting pressure on Bank of East Asia’s net interest income.

Meanwhile, with economic growth slowing in both Hong Kong and Mainland China and the property market still in a downcycle, a further rise in non-performing loans could weaken asset quality and increase credit impairment losses, ultimately weighing on profitability.

All of Bank of East Asia’s bonds—including senior non-preferred—carry loss-absorbing features. In the event of a trigger, these bonds may be partially or fully written down, or converted into common or preferred shares. This structural feature explains why the bond credit ratings are lower than the bank’s issuer rating, which is in the A range.

Conclusion

As interest rates declined, Bank of East Asia’s net interest income and margin fell from their peak. However, solid performance in non-interest income and lower credit impairment losses helped boost net profit.

By actively restructuring its asset portfolio, improving collateral coverage, and reducing exposure to high-risk loans—especially those linked to China’s property sector—Bank of East Asia has significantly lowered overall credit risk. Its CET1 ratio rose to 23.7%, near the top of the industry, reflecting a strong and resilient capital structure.

The bank’s USD-denominated bonds offer higher yield to maturity than most peers. Combined with its solid credit profile, these bonds present attractive investment potential worth investor attention.