Bank of East Asia's SMBC stake increase could trigger short-term re-rating

But BEA has to prove that it has better risk management than its Chinese peers.

According to Nomura, while BEA may not offer shareholders the best ROE in the shorter run relative to peers, we also see the recent 1-month >10% underperformance relative to the Chinese banking sector as unjustified given BEA derives a third of its earnings from China.

Here's more from Nomura:

In fact, BEA even underperformed its HK-listed peers during this period. Following transfer of coverage earlier this year, we revise our earnings forecasts for FY12/13/14F by 12/-1/-1% and revisit our cost of equity assumptions based on more current figures. 

SMBC stake increase could trigger short-term re-rating
It is worth highlighting that when SMBC subscribed to BEA shares back in Dec 2009, it did so at HKD30.6 per share (or ~1.3x 1-year forward P/B), so we thinkit may still consider current valuation at ~1.1x as reasonable.

BEA has been a consensus sell, we think largely due to its relatively low ROE and Chinese exposure.

While we believe investors should consider BEA for differentiated exposure to the Chinese banking sector, we think that BEA will require atleast one credit cycle to prove that it has better risk management than its Chinese peers (given Chinese banks are only beginning to show some signs ofasset quality deterioration); thus, we are not trying to argue that BEA should trade at a premium to its Chinese peers but we think it should not be a perpetual short selling target (our quant team indicates that it would take at least 43 days for short positions to be covered – one of the highest in our HK/Chinacoverage universe, by the team’s calculations).