2H16 net profit was HKD8.2bn （+3% HoH, +10% YoY）， with full-year earningsof HKD16.2bn （-4% ex one-off）， lower than our estimates （DBe） by 2%. Theresults lacked positive surprises, with upside being a strongly capitalised bankwith CET1 of 16.6% （ex-4Q dividend: 15.6%） and a higher final dividend ofHKD2.8/shr （DBe: HKD2.5）， bringing full-year DPS to HKD6.1 （3.7% yield）。
　　While viewing HSB as a key beneficiary of rising rates, we did not see this in2H16 results. We also believe such expectations have been priced in, with thestock outperforming the HSI by 11% since the US election. Maintaining Hold.
　　Key highlights of 2H16 results:
　　Net interest income （+2% HoH, +5% YoY） was supported by loan growth（+3% HoH） and a stable margin of 1.85% （1H16: 1.85%）。 The margin trendimproved in the latter part of 2H16, helped by higher rates.
　　Non-interest income （-2% HoH, +8% YoY） came largely from fees （+8%HoH）， such as security brokerages, retail investment funds, credit cardsand FX （+89% HoH）， offset by higher insurance claims and lower returns inthe PV of the in-force long-term insurance business.
　　Asset quality stabilised in 2H16, with an impaired loan ratio of 46bps（1H16: 55bps）， with the annualised credit cost at 17bps （1H16: 21bps）， asprovision coverage finally moved up to 58% （from historical low level of47% last interim）。 Overdue loans dropped slightly, to 34bps （1H16: 38bps）。
　　Loans （+3% HoH） and deposits （+4% HoH）： Loan growth recovered after a2% HoH drop in 1H16, ending FY16 with 1.5% YoY growth. Segment-wise,the growth was driven domestically, such as from propertydevelopment/investments, wholesale and trade, residential mortgages andcredit cards. Trade recovered by 7% HoH, while lending for use outside HKcontracted by 3% HoH （-11% YoY）。 The LDR remained stable, at 69%（1H16: 70%）， with the bank's CASA at 77% （1H16: 75%）。
　　Others – capital: CET1 was 16.6% （1H16: 16.8%）， still strongly capitalised,even after stripping out the 4Q16 dividend, at 15.6%. CTI was 34% （1H16:
　　33%） and RoE was 12.5% （1H16: 12%）。
　　Maintaining Hold; key analyst briefing takeaways; risksBased on its own interest rate sensitivity, HSB expects to see an NII pick-up ofHKD2.8bn （2017E 12% of NII） for every 100bp parallel shift in rates, but theimpacts are based on simple modeling, without considering the potentialchanges to customer behaviour in a rising rate environment. Moreover, thiswill be dependent on the sustainability of higher rates, as the HIBOR hassoftened lately, with 1M HIBOR falling to 45bps （75bps in early January）。 Loangrowth guidance remains subdued, as HSB prioritises quality over quantity.
　　With the stock trading at 2.2x P/B, 17.1x P/E and 13.4% RoE in FY17E, we donot see strong upside catalysts near term. We cut our 2017-18E earnings by 2-3%, on a fall in non-interest income （non-fee）， offset by lower provisioning. Wevalue HSB using a GGM. Upside risk: higher rates leading to significant marginexpansion. Downside risk: significant property price drop.