Hong Kong's BEA kicks off earnings with 6 pct rise in H1 profit

* H1 net profit HK$3.58 bln vs HK$3.38 bln yr ago * BEA says asset quality to remain under pressure in H2 * HK banks have increased their mainland exposure in recent yrs (Adds details of exposure to mainland clients, comments from asset manager) By Saikat Chatterjee HONG KONG, Aug 1 (Reuters) - The first of Hong Kong's banks kicked off earnings on Friday with Bank of East Asia reporting a slight gain in quarterly profit as investors focused on the sector's strengthening ties with China and the risks that could pose. Bank of East Asia, which posted a 6 percent rise in first-half net profit, said it would take measures to mitigate credit risks in China where it expected asset quality to remain under pressure in the second half of the year. The growing exposure of Hong Kong banks to the mainland in recent years has grabbed headlines about their ability to scrutinise credit risks against the backdrop of a slowing Chinese economy. Rating agencies and supranational bodies such as the International Monetary Fund have openly voiced concern. Long praised by investors for their sound risk management, Hong Kong's mid-sized banks are increasingly becoming more exposed to any blowup in default risk as they hunt for new opportunities in the mainland amid sluggish growth at home. "Hong Kong banks' exposure to China has been rising for a while, and we would be cautious of any sharp rise in exposure because they may not have the requisite expertise to analyse the underlying credit risks on the ground," said Frank Tian, portfolio manager and part of a team that manages $25 billion in equities at Aberdeen Asset Management. Data from the Hong Kong Monetary Authority (HKMA), the city's de-facto central bank, shows a sharp rise in cross-border business. By the end of 2013, the exposure of Hong Kong banks to corporate borrowers constitutes a fifth of their total assets compared with around 5 percent in 2007. While the HKMA has repeatedly said a significant share of the non-bank mainland exposure is backed by guarantees and is symbolic of a strong financial centre, the fact remains the ability of a Dah Sing Bank or a Wing Hang Bank to absorb big losses is far less than their foreign counterparts such as Standard Chartered or HSBC. For example, Bank of East Asia, a medium-sized city lender, would require only roughly 15 percent of its net loan book going sour to wipe out its entire equity base, according to its 2013 annual earnings. Bank of East Asia, which posted a first-half net profit of HK$3.58 billion ($462 million), said loans to customers in mainland China edged up 9.5 percent to HK$207 billion at the end of June from end-December. Those loans comprised roughly half of its total loan book. Bad debts as a percentage of total loans rose to 0.44 percent in the first half from 0.39 percent at the end of 2013. "A tipping point may be reached if the yuan depreciates very sharply or if loan books are expanded aggressively," said Aberdeen's Tian. Under an extreme scenario presented by the IMF in May, if the default rate in the mainland banking system's interbank obligations hits 80 percent, the losses would wipe out all the capital in the city's banking system. System-wide, non-performing loans as a percentage of their total loan book remains below 1 percent. ($1 = 7.7498 Hong Kong Dollars) (Reporting by Saikat Chatterjee; Editing by Ryan Woo)