Bank of East Asia Ltd (BEA), Hong Kong's fifth-largest lender by assets, posted a below-forecast 20 percent rise in first-half earnings as higher operating costs offset strong loan growth and fee income, sending its shares lower.

The lender, worth US$9.1 billion, reported a net profit of HK$1.88 billion (US$241 million) in the first half, compared with HK$1.57 billion in the first six months of 2006. Five analysts polled by Reuters were expecting profit of HK$1.95 billion.

Profits from its business on the mainland, where it has one of the largest networks among foreign banks, rose 83 percent to HK$413 million in the first half and the lender said it expected earnings from its mainland operations to continue growing at 80-90 percent a year.

Lehman Brothers analyst Michael Siu said a 33 percent rise in operating costs and a higher tax charge caused Bank of East Asia to miss forecasts. He reiterated his "overweight" rating on the lender.

"The mainland investment will pay off over time and net interest income in H2 should improve further with the strong loan growth," Siu wrote in a note.

Bank of East Asia shares tumbled as much as 7.7 percent following the firm's midday earnings report before paring losses to close 4.32 percent lower at HK$45.4 each. The stock had risen nearly 8 percent this year through Wednesday, lagging a 12.5 percent gain in the Hang Seng Index.

Chairman David Li said conditions looked good for continued growth.

"It is expected that loan growth and new business opportunities will remain buoyant in the second half of this year, due to the positive economic outlook for both Hong Kong and the mainland," he said in a statement.

Li, who is a board member of Dow Jones & Co Inc, may face civil charges in a US Securities and Exchange Commission insider-trading investigation linked to News Corp's US$5 billion bid for the US media company. He declined to comment on the matter yesterday.

Analysts expect the case to have little impact on the bank, which is controlled by the Li family.

Bank of East Asia has 44 outlets on the mainland and aims to increase that to more than 100 by 2010.

With a locally incorporated mainland unit, BEA can offer local-currency yuan services to 1.3 billion mainland Chinese, and increase its yuan deposits base to support lending growth.

It reported first-half loan growth of 36 percent to HK$202.9 billion, mainly driven by mainland lending, which rose 64.5 percent.

Net interest income, derived from lending, rose to HK$2.76 billion from HK$2.37 billion a year ago, while non-interest income rose 45.8 percent to HK$1.7 billion. Its expenses also increased, however, due to the costs of local incorporation in China and the opening of new branches there, boosting its cost-income ratio to 48.7 percent from 46.2 percent a year ago.

Rival Hang Seng Bank, a unit of global lender HSBC Holdings Plc, posted a 43 percent first-half profit gain on Monday, driven by interest and fee income growth and a gain tied to the IPO of the Industrial Bank.

Reuters

(HK Edition 08/03/2007 page6)