Goldman Sachs maintains a Sell rating on Bank of East Asia; 1H26 improves sequentially, but CRE and credit costs remain key constraints

Overview

This is a Goldman Sachs 1H26 earnings preview report on Bank of East Asia (00023.HK). The report expects the bank's first-half performance to improve significantly from 2H25, but the improvement is driven more by factors such as property revaluation, associate income, and non-interest income, while core pressure remains from commercial real estate-related asset quality, elevated credit costs, prudent loan growth, and the drag on net interest income from lower interest rates.

Core views

Goldman Sachs's core view is that sequential improvement in 1H26 earnings is insufficient to change its negative view of the stock. The report forecasts 1H26 net profit of HK$2,111mn, down 7% year over year and up 123% sequentially, with PPOP up 14% year over year and 8% sequentially. Goldman Sachs raises its 2026-2028 EPS forecasts but maintains its Sell rating and HK$13.50 target price, as the earnings upgrade is offset by a higher cost of equity, while CRE exposure and elevated credit costs in 2026-2027 remain the key uncertainties.

Analysis framework

The report applies a bank earnings forecasting framework and a two-stage DDM valuation methodology, focusing on the breakdown of net interest income, non-interest income, expenses, provisions, associate contributions, capital returns, and asset quality indicators. The analysis also incorporates 3M HIBOR, Fed forward rates, loan growth assumptions, management's operating expense growth target, and credit cost guidance to assess the effects on earnings revisions and valuation.

Methodology notes

• Valuation methodologyTwo-stage DDM

  Estimate the 12-month target price using the dividend discount model

  Goldman Sachs maintains its HK$13.50 target price based on a 12-month two-stage DDM; the target price increase from higher earnings is offset by a higher cost of equity resulting from a higher risk-free rate.

• Factor analysisGS Factor Profile

  Compare stock characteristics based on growth, financial returns, valuation multiples, and composite percentiles

  GS Factor Profile uses analyst forecasts to calculate percentiles for growth, financial returns, and valuation multiples; for financial stocks, key metrics include EPS, sales growth, ROE, P/E, P/B, and P/D.

• Trading event frameworkM&A Rank

  Assess the probability of a company becoming an M&A target

  Goldman Sachs uses an M&A rank score from 1 to 3 across its global coverage, with 1 representing high probability, 2 medium probability, and 3 low probability; when the rank is 1 or 2, an M&A component may be included in the target price.

• Data platformQuantum

  Goldman Sachs's proprietary financial data and forecasting database

  Quantum is used to obtain companies' historical financial statements, forecasts, and ratios, and can support in-depth single-company analysis or cross-company comparisons.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Bank of East Asia (00023.HK)

  The report's covered stock; Goldman Sachs maintains its Sell rating and HK$13.50 target price.

  Strengths

  Broad-based foundation for non-interest income growth, with further room to expand the wealth management platform; 1H26 is expected to improve significantly from 2H25; the NPL ratio is forecast to decline gradually from 2.7% in 2025 to 1.9% in 2028E.

  Weaknesses

  CRE-related exposure remains a valuation overhang, with credit costs expected to remain elevated in 2026-2027; net interest income is affected by falling interest rates; loan origination is expected to remain prudent while legacy CRE loans are being cleared.

  Comparison

  The report discloses its rating relative to banks in the coverage group, including Asian banking peers such as BOC Hong Kong, HSBC Holdings, DBS Group, OCBC, and UOB.

  Risks

  Upside risks include better-than-expected NIM, lower-than-expected credit costs resulting from better asset quality, and higher-than-expected dividend payouts or share buybacks.

Key data

• 1H26 net profit forecastHK$2,111mnDown 7% year over year and up 123% sequentially.
• 1H26 PPOP forecast directionUp 14% year over year and 8% sequentiallyThe sequential improvement is mainly attributable to lower property revaluation pressure, normalization of associate income, and growth in non-interest income.
• 2026E/27E/28E EPS adjustments+3.9%/+7.2%/+4.0%Reflects higher 3M HIBOR, interest-rate expectations, and upgraded non-interest income growth forecasts.
• 12-month target priceHK$13.50Based on a two-stage DDM; the target price remains unchanged.
• RatingSellGoldman Sachs maintains its Sell rating despite upward earnings forecast revisions.
• Non-interest income growth expectationApproximately 10% annual growth in 2026-2028Close to BEA's approximately 14% target, but partly offset by lower loan growth and expense growth.
• Operating expense growth targetApproximately 5% p.a.Management's three-year operating expense growth target for 2026-2028 is incorporated into the model.
• Credit cost guidanceRemains elevated in 2026-2027 and trends below 60bp in 2028Persistently elevated credit costs are an important reason for the report's cautious view.
• 2026E net profitHK$4,106mnThe financial tables show 2026E net profit increasing 28% from 2025.
• 2026E NPL ratio2.4%The financial tables show the NPL ratio declining from 2.7% in 2025 to 2.4% in 2026E.

Impact & implications

For investors, the report conveys a signal of “sequential earnings recovery, but risks remain unresolved.” The share price could be supported if non-interest income growth and asset quality improve more than expected; however, if CRE pressure persists, credit costs exceed expectations, or falling interest rates compress NIM, the earnings recovery may fail to translate into a valuation re-rating.

Risks

• Commercial real estate exposure in Hong Kong and mainland China may continue to weigh on asset quality and investor confidence.
• Credit costs are expected to remain elevated in 2026-2027, potentially constraining earnings realization.
• Falling interest rates may weaken net interest income and net interest margin performance.
• Lower loan growth assumptions reflect the possibility that the bank will continue lending prudently while clearing legacy CRE loans.
• The approximately 5% annual operating expense growth target may offset part of the improvement in revenue.
• Changes in China's cross-border regulatory environment may have potential effects on the banking business.

What to watch

• Updates on CRE exposure and related provisioning trends when 1H26 results are released.
• Management's latest guidance on how long elevated credit costs will persist in 2026-2027.
• The impact of changes in 3M HIBOR and Fed forward rates on NII and NIM.
• Whether non-interest income can sustain approximately 10% annual growth momentum.
• Progress in expanding the wealth management platform and its contribution to fee income.
• Whether dividend payout ratios, share buyback plans, or capital management policies exceed expectations.