2H15 results lower than Deutsche Bank estimate by 1.5%HSB reported net profit of HKD27.5bn, with 2H15 of HKD7.5bn – stripping outthe Industrial Bank disposal gain of HKD10.6bn, earnings rose 4% YoY. The keynotable was a proposed special dividend of HKD3/shr (on top of 4Q DPS ofHKD2.4), bringing total DPS to HKD8.7 in FY15 (FY14: HKD5.6) – 6.5% yield –but as the special DPS is one-off, with unattractive current valuation (1.8x P/B,2017E RoE 14%) and a weak core operating trend, we maintain our Hold onthe stock.
Key highlights (HoH):
Net interest income (+3% HoH), with NIM falling by 6bp to 1.8% in 2H15
Non-interest income (-37% HoH), with insurance MTM and fee -19% HoH;weaknesses coming from retail funds (-32%) and insurance (-10%)
Cost to income ratio at 37% (1H15: 31%)
Asset quality: Stable with ann. credit cost of 15bp in 2H15 (1H: 18bp), withimpaired loan ratio at 0.4% (1H15: 0.43%); overdue loans from HK andChina increased by 83% and 138%, respectively
Loan (2%) & Deposit (flat): Broad increase in loan growth, except forproperty development (-2% HoH), lending for use outside of HK (-1% HoH),and stock brokerage; LDR at 70% (1H: 69%) and CASA at 71% (1H: 67%)
Capital: CET1 at 17.7% (1H15: 17.1%); stripping out the 4Q and specialDPS, pro-forma CET1% should be 15.7% (-200bp) (adjusted FY14: 14.6%)
It is really a special dividend; lack of strong upside catalysts
We see a lack of positive catalyst in HSB after its one-off special DPS. HSBfaces operating challenges in FY16: margin pressure, sluggish fees, lack ofloan demand, and continued pressure in asset quality. As the macroenvironment further weakens, we believe investors will grow increasinglyuncomfortable over its low current provision coverage of 58% and 38% riskweight density. We value HSB using the Gordon Growth Model (P/B = ROEg/COE-g) to obtain a target price-to-book ratio. Upside risks: worse-thanexpected economic outlook; Downside risks: worsening investment sentiment.