HSB held its FY16 result conference on Tuesday afternoon. FY16 earningscame in largely in line with our forecasts as a modest PPOP decline offsetlower-than-expected credit costs. Despite an improving operating outlook inFY17, we retain our Neutral rating with a new Dec-17 PT of HK$149 as wethink the current valuation already prices in a fairly bullish interest rateoutlook while implied dividend yields have become less attractive.
Group FY16 profits of HK$15.9bn (excluding hybrid dividends) weredown 42% YoY, or down 4% YoY if excluding divestment gains fromIndustrial Bank stakes, and implied an ROE of 12.1%. HSB also announcedfinal dividends of HK$2.8 per share, implying a 74% payout ratio for FY16(vs. 61% in FY15 or 66% on an apples-to-apples comparison).
What was positive? Modest NIM expansion & improving asset quality.NIM expanded 1bp HoH in 2H16 on the back of continued improvement offunding structure, with CASA ratio reaching 78% from 75% in 1H16 and71% in 2H15 despite competition on lending yields; management stillexpects more margin upside from funding costs than from lending yields inFY17 given abundant liquidity system-wide. Credit costs were up 19% YoYbut down 18% HoH, while impaired loan ratio also went down by 9bps to0.46%; management guided for improving asset quality conditions in bothHK and China.
What was negative? Weaker loan growth & non interest income. Whileloan growth picked up 3% HoH in 2H16, the momentum remains weakerthan the sector average, partially reflecting management’sprudent/conservative risk management but also limits the revenue upside.Non interest income declined 16% YoY dragged by market-related fees(mainly in 1H16) and FX gains/insurance profits.
Already pricing in a fairly benign outlook. While we are expecting animproving operating outlook in FY17, it is difficult for us to justify furthervaluation upside when the share price is trading above 2x P/B but ROE isunlikely to exceed 15% in the foreseeable future and implied dividend yieldsare less than 4% even with a higher payout ratio, which we do not think willbe sustainable. We believe HSB’s solid/superior management quality couldbe rewarded with a valuation premium but think the risk-reward remainsmore attractive at BOCHK.