Investment banks and brokers estimate that Bank of East Asia's (BEA) profits from last year will be annouced at more than 20 percent, but they cautioned that the lender's subprime-related investments should be looked into carefully.

The robust growth of Hong Kong's fifth largest bank - which will announce its actual earnings on Friday and kickstart an earning season for local banks - prompted some analysts to give a "neutral" or "buy" tag to the stock.

Credit Suisse expects BEA's net profit in the fiscal year that ended on December 31, 2007, to surge 22 percent year-on-year to HK$4.2 billion. The bank's growth on the mainland is likely to be strong and is the key driver of the bank's profit again, Credit Suisse said.

It estimated that the pre-tax profits generated from BEA's mainland business may soar by 60 percent to mid HK$800 million, contributing 20 percent of the total earnings of the year.

However, the optimistic estimate didn't take into account the loss of subprime-related investment.

Jay Luong and Frances Feng, analysts from Credit Suisse, said in a report that their estimates exclude a potential loss on BEA's $600 billion Collateralized Debt Obligation (CDO) investments. However, they believe that BEA is likely to offset the loss by realizing investment gains, and expects that as a one-off loss.

Credit Suisse maintained a "neutral" rating on BEA with a target price of HK$49, as they believe the rapid overseas growth would impact both net interest margin (NIM) and operational cost.

JP Morgan shares a similar forecast with Credit Suisse, expecting the BEA's net profit to jump 22.2 percent to HK$4.196 billion, and maintain "neutral" rating on the stock with a target price of HK$51.

Michael Chan, an analyst with JPMorgan, also noted that the writedown on its $600 million CODs has yet been factored in, but he believed that the loss can be offset by one-off gains on disposing of its asset management company and property revaluations totalling HK$780 million.

CLSA is relatively cautious and expects BEA's 2007 net profit to rise 19 percent to HK$4.098 billion. Grace Wu, an analyst with CLSA, believes that BEA's profits will be driven by strong loan growth and disposal gains. He also notes the provision for CDOs as a key factor to watch.

CLSA forecasts a 28 percent year-on-year loan growth, buoyed by 70 percent growth on the mainland and 12 percent growth in Hong Kong loan.

The solid fundamentals encourage CLSA to maintain a "buy" rating for the stock with a target price of HK$59.

Shares of BEA were up 2.61 percent yesterday to close at HK$41.3 yesterday.

(HK Edition 02/13/2008 page3)