Higher operating expenses offsets low credit costs
DSFH reported 1H12 net profit of HKD591m, which was 7% above DBestimate. Key variance was 1) strong trading income and insurance investmentreturns and 2) lower bad debt charges (annualized credit cost of 6bps) onimproved quality of loan book. However, costs were up more than expected by20% YoY. The management explained that excluding the Lehman mini-bondrelated write-back that occurred in 2011, the underlying increase in operatingexpenses should be mid-single digit. Despite such explanation, we feel thatcost/income ratio of 60% is high. Meanwhile, on the insurance business side,premium income decreased 7% YoY, while change in interest rates helped toincrease value in force by 14% HoH. Insurance investment portfolio performedstrongly with the rise in bond portfolio, achieving 8% annualized return.
1H12 banking business in detail
On the banking side, customer loans grew by 1% HoH, with 5% HoH increasein overseas loans helping to offset 10% HoH decline in trade finance.Mortgage loans declined by 6% HoH. Benefiting from recent easing fundingcosts and loans re-pricing higher, NIM improved 15bps HoH to 1.47%. Bank ofChongqing continued to grow strongly, with associate income rising by 14%yoy, contributing 28% of pre-tax profit. Tier 1 ratio was stable at 10.3%, whilethe issuance of SGD225m of subordinated notes improved CAR by 1ppt to16.2%. DSFH declared an interim dividend of HKD0.29 per share (pay out of15%).