Good set of core result, flat DPS YoYHSB reported 1H15 earnings of HKD20bn (+2x HoH, 1.4x YoY) helped by itsdisposal of Industrial Bank (IB) investment. Stripping out the gain ofHKD10.6bn, results of HKD9.4bn (+7% HoH, +11% YoY) beat DBe estimate by6% - helped by non-interest income and lower provision charges. DPS remainsflat YoY at HKD2.2/share.Key highlights from 1H15:
NIM and NII (+2% HoH, 8% YoY) – NIM of 1.86% (-2bp HoH, -6bp YoY)and a loan growth of 2% HoH (6% YoY).
Non-interest income (+10% HoH, +27% YoY) – As expected, fee incomewas strong (+17% HoH), helped by an active stock market activities, withpick up in stock brokerages (+55% HoH), investment funds (+33% HoH).
Operating expenses (+3% HoH, +11% YoY) – Staff costs rose (+9% HoH,11% YoY) as cost-to-income ratio fell slightly to 31% (1H14/2H14: 32%)
Bad debt provisions (-26% HoH, +76% YoY) – While credit cost hasstabilized sequentially during interim period at ann. 18bp (2H14: 25bp),impaired loan ratio has moved up to 0.43% (2H14: 0.32%, 1H14: 0.20%).
Loan (+2% HoH, + 6% YoY) and deposit (+5% HoH, +9% YoY) – Themomentum of loan has slowed to 2% HoH, led by property development(+8% HoH) within corporate segment and retail segments such asmortgages (+6% HoH), with offsets in lending outside of HK (-1.5% HoH)and trade finance (-2.5% HoH). LDR fell to 68.6% (2H14: 70.5%).
Capital solid at 17% CET1% - CET1% improved to 17.1% (2H14: 15.6%)post disposal in IB. There is some excess capital (assuming at 14%) whichmay leave some room for higher progressive dividend in 2H15.Analyst briefing at 5pm – Looking for guidance in DPS outlookAt the current valuation of 2.3x P/B, 11x P/E and 13% core 2015E RoE, webelieve the share price already reflects the possibility of a higher progressiveDPS payout. In our view, while we expect the bank to potentially pay higherDPS in 2H15, it is unlikely and the bank wouldn’t pay out all excess capital atonce. HSB should potentially leave some excess capital for potentialinvestment opportunities and RwA re-flation (as a result of regulatory prudencyor normalized credit cost environment). Maintain Hold.