Solid core earnings growth offset by some concern in asset quality
While DSF has reported in-line interim earnings of HK$ 680m, we see some encouraging signs given solid improvement in core bank earnings growth as supported by net interest income (+12% HoH), backed by a ro bust loan growth (+8.3% HoH), higher LDR of 80% and NIM expanding by 16bp HoH to 1.77%. For the HK banks that have reported so far, customer deposit growth lagged behind loan growth, a sector wide phenomenon. Overall non-interest income growth was solid, with strong contributions from fees while there was an one-off trading loss of -HK$354m (2H 12: +HK$295m) stemming from mark-to-market losses for its insurance bond book, which offset decent net income from insurance premium activities at HK$348m (2H12: -HK$367m). Besides insurance trading loss, the other weak si de of the results was concern arising from asset quality deterioration, with NPL rising to 0.4% (2H12: 0.35%) with annualized credit cost at 27bp (2H12: 11bp). Capital remains adequate, at 10% tier 1 capital. BCQ earnings accounted for 34% of DSF results (2H12: 35%).
Valuation discounted to peers, we expect re-rating to continue
Currently trading at 0.6x P/B, we see its discounted valuation vs. peers and improving fundamentals w ill provide key upside support to share price. We maintain a Buy rating on DSF as we see this set of result an encouraging sign it now has reached an inflection point for outperformance, with better earnings stability. We value DSF using the GGM. Key downside risks: 1) Deterioration in asset quality; and 2) a reversal in liq uidity inflow and higher funding cost.