Headline results in line with our estimates, core earnings slightly weaker
HSB reported headline earnings of HKD8.5bn which was exactly in line with our estimates. However, core earnings were slightly weaker as slower-thanexpected revenue growth (mainly from NII) was offset by lower credit cost and investment property revaluation. Stripping out non-core revaluations, earnings were 2.5% below. We maintain our Hold rating on the stock.
Key highlights: Steady set of results, as expected
While net interest income was flat 0.4% HoH on a flat margin of 1.92% (2H13: 1.93%) and 8% HoH loan growth (deposits grew 2% HoH), we believe the lending growth could be backend loaded as interest earnings assets grew only 2.6% HoH. Fees grew 4% HoH as better growth in WM fees and insurance sufficiently offset drop in credit card and stock broking. We have seen continued good cost control with CTI maintained at 32% (2H13: 33%) while asset quality remained benign with annual credit cost of 11bp (2H13: 12bp), improvement in impaired loan percent to 20bp (2H13: 22bp). Instead of earnings, capital was the key focus with CET1 falling by 210bp HoH to 11.8%.
Focus more on the drop in CET1 and fully loaded CET1 of 9.4%
While earnings came in largely in line with estimates, the key surprise was onits CET1 where the significant drop was due to (1) HKD6bn deduction, mainly an additional 10% deduction from transitional arrangement under Basel III (deduct 130bp from CET1); (2) RwA growth (11% HoH) as a result of loan growth as well as using a more conservative model; (3) temporary differences from final dividend (-50bp). Also, a fully loaded CET1 was disclosed for the first time at 9.4%. Unless we see any stake disposal in IB (still has AFS losses of ~HKD1bn), we believe its current fully loaded CET1 may only look as slightly adequate but not excessive, which we believe would cap any near-term upside in dividend payout. We currently maintain payout of HKD5.5 in FY14.
Valuation looks fairly valued, disposal of stake remains key to re-rating
The bank’s defensive qualities is priced in as the stock looks fairly valued to us at 2.2x P/B with 16% 2014E RoE. While stake disposal remains a key catalyst, there remain uncertainties as to the timing, disposal of partial or full stake disposal and current unattractive valuation for IB investment.