HONG KONG: Bank of East Asia Ltd (BEA), Hong Kong's third-biggest bank by market value, said it expects lending at its mainland unit to increase 5 percent to 10 percent this year after falling in the first six months of 2009.

"There is a strong loan pipeline emerging in the second half," Deputy Chief Executive Brian Li, who oversees the bank's mainland business, said during an August 27 briefing. "To better capture the impact of the economic growth, we are diversifying our loan portfolio to industries such as energy and mining."

Bank of East Asia reined in credit on the mainland in the first half to avoid bad debts, even as rivals, including Bank of China Ltd, flooded the market with a record $1.1 trillion of new loans. The lender, founded by Li's family 90 years ago, was also hampered by the credit crisis that ravaged the global economy and briefly triggered a run on deposits in September last year.

"Because of the financial crisis, for a couple of months we didn't really try to make any new loans," said Li, son of the bank's 70-year-old Chairman David Li. "Credit quality was of course one of our big concerns and at that time, funds were also much more expensive."

Bank of East Asia's outstanding loans in China fell to HK$80.2 billion ($10.3 billion) as of June 30 from HK$85.7 billion a year earlier. Operating profit from the mainland fell 13 percent to HK$731 million as non-interest income dropped by almost a third.

Trading gains helped the group post a 47 percent increase in first-half profit even as loans to customers fell 6.1 percent. Lending fell after the credit crisis and a run on deposits drove up funding costs and led to the bank's first loss in at least four decades in the second half of last year.

The bank plans to increase the total number of branches and sub-branches on the mainland to 95-100 by the end of 2010, Li said. It now has 71 after adding four in the six months through June 30.

Bank of East Asia is in "a mature stage of discussion" to set up a mutual fund venture with a mainland partner this year, Li said. He declined to identify the other company and said the venture will be of "a small size."

Beijing fully opened its banking industry to overseas companies in December 2006, sparking a rush among foreign banks to add outlets to compete for the nation's $6.5 trillion of corporate and household deposits.

Like Bank of East Asia,HSBC Holdings Plc, Citigroup Inc and Standard Chartered Plc are among those that offer yuan-denominated services for consumers on China's mainland, and they also own stakes in local banks.

As for its yuan-based investment vehicles, Bank of East Asia announced on August 11 that it plans to offer yuan-denominated shares on the Shanghai bourse in 2010 and to sell yuan-denominated bonds in Hong Kong.

However, unlike bigger foreign rivals, Bank of East Asia will probably avoid acquisitions as it grows on the mainland, Li said. The CSI 300 Financial Index of 50 financial companies has rallied 70 percent this year.

"It's fair to say that we've missed the best time to acquire stakes in domestic commercial banks," Li said. "Right now valuations are a bit too high."

Bloomberg News

(HK Edition 09/01/2009 page4)