CICC released a research report maintaining its forecasts for Bank of East Asia (00023). The company currently trades at 0.4X/0.4X 2025E/2026E P/B. Taking into account changes in overseas interest rate cut discount factors, improved risk appetite for Hong Kong stocks, and ample liquidity, the firm raised the company's target price by 25% to HK$14.12, corresponding to 0.4X/0.4X 2025E/2026E P/B with 4.4% upside potential. The neutral rating is maintained.

The company's 1H25 operating revenue declined 2.1% year-on-year, in line with expectations, mainly due to HIBOR decline compressing net interest margin space. The company's 1H25 net profit attributable to ordinary shareholders increased 24.7% year-on-year, outperforming expectations, primarily due to lower impairment losses. CICC's main viewpoints are as follows:

**Interest Rate Decline Weighs on Net Interest Income** The company's 1H25 net interest income decreased 10.7% year-on-year and 11.5% sequentially from 2H24, with the decline slightly higher than disclosed peer banks. This was mainly due to the company's credit exposure concentrated in Hong Kong and Mainland China, where interest rate cuts in both regions and relatively conservative lending strategies in the mainland suppressed net interest margins. Looking ahead, HIBOR rose rapidly after August 13, with 1M HIBOR recovering to 2.84% as of August 21. The firm believes net interest income pressure may ease in the second half.

**Strong Non-Interest Income Performance Offsets Net Interest Income Pressure** The company's 1H25 non-interest income performed exceptionally well, with other non-interest income up 50.5% year-on-year, mainly benefiting from foreign exchange gains and losses. Fee income reached HK$1.65 billion, up 16.6% year-on-year, mainly benefiting from strong cross-border wealth management business activity in Hong Kong during 1H25. The company's mainland China customers increased 62% year-on-year in 1H25, while southbound customers grew 54% year-on-year, driving retail banking fee income up 285% year-on-year.

**Credit Costs Decline from High Levels, Main Reason for Better-than-Expected Net Profit, but Outlook Remains Cautious** For the first time in nearly three years, the company experienced a combination of "lower credit loss provisions + declining NPL ratio + slightly lower provision coverage ratio." 1H25 provision charges decreased 11.9% year-on-year and 2.9% sequentially; credit cost was 0.95%, down 13bp year-on-year and 3bp sequentially; NPL ratio decreased 9bp to 2.63%; provision coverage ratio fell 0.3ppt sequentially to 37.3%. However, the company maintains a cautious outlook on credit costs, expecting 2H25 credit loss levels to be no lower than 1H25 (0.95%) and full-year 2025 credit costs to be no lower than 2024 (1.03%), mainly considering: 1) Hong Kong: Currently 83% of the company's Hong Kong property exposure is collateralized with an average LTV of 55%, and over 90% of exposure has LTV below 70%. Looking forward, while no significant deterioration in related customer asset quality occurred in 1H25, the company does not rule out increased provisions in the second half due to customer funding difficulties or declining collateral values. 2) Mainland China: Current related exposure has a book provision coverage ratio of 45.7%, while including collateral value brings provision coverage to 49%-52%.

**Dividend Payout Ratio Remains Stable** The company's 1H25 dividend per share was HK$0.39, with a payout ratio of 45.3%, essentially in line with previous years. Starting in 2025, Hong Kong banks will adopt Basel III, with the company's RWA declining 25% year-on-year and core Tier 1 capital adequacy ratio increasing 6.1ppt sequentially to a high of 23.7%. However, the company stated it will still prioritize reserving capital buffers for future economic conditions rather than directly increasing shareholder returns.

**Risk Warning:** Asset quality of Mainland China and Hong Kong property-related exposure may deteriorate more than expected.