Outlook & Prospects
2H11 guidance Management expected loan growth to slow from 1H11 due to a slowing economicgrowth in China. On the other hand, NIM is unlikely to widen given intense deposit competition andprolonged low interest rate environment. Operating environment should remain challenging for DSF in2H11 and FY11.
Asset quality as the key negative A key negative surprise for DSF’s 1H11 results was a sharpdeterioration in asset quality. Management attributed the increment in impaired loans during 1H11 toits Mainland SME exposure. The PRC-related impaired loans rose from HK$6m in 2H10 to HK$160min 1H11, with impaired loan ratio rising sharply from 0.16% to 2.32% accordingly. Despite Managementbelieved that systemic deterioration of asset quality was unlikely in their loan book, the rapid growth inimpaired loan should be a cause for a concern.
Lower investment return expected Insurance segment was one of DSF’s few key strengths.However, in light of the recent weakness and volatility in global financial markets, investment return ofDSF’s insurance business will be negatively impacted and the insurance segment is likely to become adrag on DSF’s performance in 2H11.
Lack of upside on fundamentals Similar to Chong Hing Bank, DSF’s share price are buoyed by theM&A speculation.Nevertheless, with single-digit ROE, relatively insignificant China exposure(Management did not reveal any near-term expansion plan in China) and weak franchise/growthprospects in HK banking operations, DSF is lack of strong core business to boost its overall results.
Nevertheless, the current valuations of 0.54x FY11E P/B and 7.5x FY11E P/E are among the lowest inthe sector, which should have reflected DSF’s weaker fundamentals. As such, we remain NEUTRALon the counter.
Recommendation: Neutral