Strong banking business partly offset by insurance
Headline beats, underlying slightly below. Headline net profit rose 21% YoY to HK$1,236mn, 7%/10% above our/consensus estimates due to higher-than-expected associate earnings and exceptional gains. Post-provision operating profit was, however, 8% below forecast due to weaker life insurance underwriting profit (ex-investment income). In FY12, it restructured its life insurance business by focusing more on selling regular premium products. This, coupled with a number of assumption changes (e.g. lowering long-term interest rate assumptions), led to a 1% fall in the value of in-force business. The banking business did well. Net interest margin rose 13bp HoH to 1.60% (CICCe: 1.53%) driven mainly by lower funding costs as a result of abundant liquidity. Fee income grew 27% YoY driven mainly by wealth management, bancassurance and treasury income. Asset quality further improved with NPL balance down 22% HoH. Headline expense growth of 20% was distorted by the write-back in provisions for Lehman mini-bonds in FY11. Underlying expenses grew nearly 10%, lower than revenue growth of 20%. FY12 DPS of HK$1.18 was up 10% (payout ratio: 28%).
FY13 outlook: Management commented that DSF had an encouraging start YTD: 1) bancassurance and wealth management income did well; 2) there is possibly a bit more upside to NIM given higher exit NIM at end-FY12 vs. 2H12 average; 3) asset quality remains resilient. Operating expenses are likely to grow at similar rate to FY12 (i.e. high single-digit to ~10%). As to a mortgage rate hike, it is still monitoring the situation and has not reached a decision. Proforma Basel III capital ratios are broadly similar to the Basel II basis, with slight benefit to core tier-1 ratio due to lower associate deduction.
Valuation and recommendation
We largely maintain our FY13/14e earnings forecasts, but cut DPS 10%/8% due to lower-than-expected payout ratio (ex-associate earnings basis). TP was cut marginally from HK$46.07 to HK$45.68. We reiterate our ACCUMULATE rating.
Risks
Earlier-than-expected end of QE measures in the US.