1H16 results lower than Deutsche Bank estimate by 2%; maintaining Hold
HSB reported interim net profit of HKD8bn (+8% HoH, -15% YoY ex one-off),lower than our estimates by 2%. The results were mixed – positives includeNIM improvement and a high level of CET1%, while negatives include weak feeincome, a contraction in lending, and deterioration in asset quality, withprovision coverage of 47% (a substantial drop from 72% a year ago). WhileHSB’s earnings remain relatively more visible than those of peers, we believesuch quality is priced in. With the stock trading at 1.9x P/B, 14x P/E, and RoEof 13.5% in FY17E, we do not see strong upside catalysts in the near term.
Key highlights (comparing HoH):
Net interest income (+3%) was surprisingly strong as NIM expanded by5bp to 1.85% in 1H16. The improvement in cost of funds exceeded lendingspread compression.
Non-interest income (+11%) was helped by dividend income (+9x,potentially seasonality), as well as lower trading losses (down HKD930m)and insurance MTM losses (lower by HKD200m). As expected, fee incomewas particularly weak (-10%), negatively affected by market sentiment in1H – led by securities broking (-23%), cards (-5%), and trade (-20%). Retailfunds (+4%) and insurance (+18%) remained strong. Fx income fell 37%.
Asset quality: Deterioration continues to trend up from a low base atannualized credit cost of 21bp (2H15: 16bp), mainly from exposures inMainland China. Impaired loan ratio at 0.55% (2H: 0.4%) was contributedto equally by HK (+29%) and China (+60%). Overdue loans rose to 0.38%(2H: 0.31%) as HK overdue loans rose 28%.
Loan (-2%) and Deposit (-1%): Loan growth remains muted, with keysegment support from loans in HK (+2%) partly offset by continuedunwinding in carry-trade type loans, such as lending for use outside HK(-8%) and trade finance (-13%). LDR remains stable at 70%, while cashmanagement from the corporate segment has further improved the bank’sCASA to 75% (2H: 71%).
Others – capital: CET1 at 16.8% (2H: 17.7%), still strongly capitalized afterpayout of special dividend in 2H15; CTI at 33% (2H15: 37%); DPS flat.
Maintaining Hold; key analyst briefing takeaways; risks
HSB expects operating conditions to remain challenging. The NIMimprovement came from asset (+3bp HoH) and lower cost of funding (+2bpHoH); the outlook is still uncertain in a low rates environment. Loan demandwill likely stay muted, with growth from mortgages, credit cards, andunsecured personal loans. Asset quality came more from China, with 49bp ofann. credit cost vs. HK at 7bp. Although coverage stood at 47%, it moved upto 85% of NPLs after collaterals. Capital requirement continues to evolve, andHSB expects impacts from the implementation of IFRS 9 and a risk weightfloor for certain IRB exposures. Dividend policy will be a balance betweenfuture capital requirements and shareholder return. We value HSB using theGGM. Upside risk: higher rates. Downside risk: severe property price drop.