1H11 net profit was up 11% YoY and HoH to HK$559mn, 3%below our forecast. However, this was mainly boosted byexceptional gains from disposal of investment securities. Whilenet interest margin rose 3bp HoH to 1.52% (driven by strongloan growth and loan re-pricing, which more than offsetfunding cost increases), lower-than-expected net trading incomeand higher-than-expected operating expense led to a 4% HoHdrop in pre-provision operating profit, 15% below our forecast.
NPL doubled HoH to ~HK$400mn, though the NPL ratioremained low at 0.5%, and annualized credit cost remainedrelatively low at 0.22%. Management commented that theincrease was due to several isolated corporate cases (related toChina); they do not see overall stress on asset quality.
10% growth in customer deposits in 1H11 helped sustain theloan-to-deposit ratio at a relatively healthy 73%. Core Tier-1ratio remained healthy at 10.9%. Dividend per share rose 45%YoY to HK$0.29, with a payout ratio of 15% (10% in 1H10).
For 2H11, management expects loan growth to slow from1H11’s 12%, due to slower economic recovery in the US andEurope, and slowing economic growth in China. Hence, whilethe prevailing deposit competition remains intense, it could easein 2H11 as sector loan growth tapers off.
Earnings and target price revision:
We cut FY11~13f net profit by 5%/10%/12% due to weaker thanexpected asset quality and non-interest income. We accordingly cuttarget price 18% to HK$39.8, based on mid-2012f 0.7x P/B.
Valuation and recommendation:
We maintain ACCMULATE rating as DSF is trading at one-yearforward P/B of 0.6x.
Risks:
Slowdown in economic growth could lead to worse-than-expecteddeterioration in asset quality, given DSF’s larger exposure to SME.