DPS is likely to move up only on a steady path
HSB's premium valuation is a reflection of the uality of its retai franchise andearnings stability, as seen in today's result （2% above Dbe）。 Moreover, itsdividend policy has historically been one of the key stock pricedrivers. However, in today's results, there was no positive surprise – aprogressive absolute dividend payout of HKD6.70/share in FY17 （+10% YoY）。
The current yield looks low （3.9%） vs. the historica average （~5%） as theincrease in dividend payout fel to catch up to share price expectations. At 2.5xP/B and 14% 2018E RoE, the valuation looks demanding; maintaining Sell.
Key highlights of 2H17 results:
Net interest income （+8% HoH, +13% YoY） was supported by loan growth（+8% HoH） although margins remained flat at 1.94% HoH, due to loancompetition for corporate lending.
Non-interest income （-16% HoH, +20% YoY） was largely attributable tolower FX and trading gains, while fees remained resilient （+5% HoH, +12%YoY）。 WM income fel 16% HoH （+26% YoY）。
Asset uality remains benign, with the impaired loan % at 24bps （1H17:
42bps） while credit costs dropped to 10bps （1H17: 19bps）。 Provisioncoverage improved to 81% （from 68% in1H17）。 Overdue loans fel to 20bps（1H17: 26bps）。
Loans （+8% HoH） and deposits （+6% HoH）： Loan growth was strong,supported by overseas lending （+13% HoH） while domestic lending rose（+7% HoH） on corporate property （+7%）， financia concerns （+33%），mortgages （+5%） and credit cards （+15%）。 LDR tightened to 73% （1H17:
71%）， with better CASA at 79% （1H17: 78%）。
Others – capital: CET1 remained strong at 16.5% （1H17: 16.2%）， andshould be 15.5% after stripping out the 4Q17 dividend. CTI was 33%（1H17: 30%） and annualized RoE was 14.4% （1H17: 14.5%）。
Maintaining Sell; key analysts’ briefing takeaways; risks
As expected, much of the focus of the analysts’ briefings was on dividendpolicy and NIM trend – the 2H17 outcome was a disappointment, in our view.As discussed above, dividend payout remains a crucia share price driver forHSB, on which expectations have run ahead of fundamentals. Due toprogressive absolute DPS policy, the payout ratio actually fel to 64% （FY16:72%） – not to mention that this ratio is already much higher than that of SGbanks （our preferred sector）。 Management also highlighted that there is a riskof higher RwA reflation from the fina Base ruling （vulnerable given HSB’slowest risk weight density among coverage banks）， which could put pressureon seemingly higher CET1. The NIM transmission from higher rates have beenlow in 2H17 largely due to loan competition and HIBOR has been relatively flaton an average basis. While the bank believes higher rates in the US shouldcontinue to benefit the bank’s NIM, this has been largely factored intoexpectations already and if HSB has to issue TLAC bonds in the future, thiscould also result in higher cost of funds.