2021 results slightly miss market consensus
　　BOC Hong Kong (BOCHK) announced 2021 results: Revenue fell 10.1% YoY to HK$49bn, and net profit dropped 13.3% YoY to HK$23bn. ROE was 7.8%. The 2021 results slightly miss our expectation, mainly due to disappointing net interest income and non-interest income. However, we expect revenue to grow substantially in 2H22 as interest rates rise and the COVID-19 pandemic eases in Hong Kong SAR.
　　Trends to watch
　　Adjusted NIM fell 24bps YoY to 1.09% in 2021; US interest rate hike　helped improve NIM. In 2021, net interest income fell 8.1% YoY to HK$31.9bn. Adjusted NIM fell 24bps YoY to 1.09% in 2021, and 5bps QoQ to 1.06% in 4Q21, mainly due to a 2H21 decline in HIBOR. Working under the assumption of seven interest rate hikes in the US in 2022, we expect BOCHK’s pre-adjusted NIM to increase by 6bps YoY to 1.12% in 2022.
　　Asset growth faster than the industry average; three businesses to　boost loan growth. In 2021, BOCHK’s total assets, loans, and deposits grew 9.6%, 6.5%, and 6.8% YoY. Growth in new loans was mainly driven by Chinese mainland enterprises in Hong Kong SAR, and premium customers from Southeast Asia. BOCHK stated it would create loan growth from three areas: Cross-border investment, renminbi-denominated business and investment, and financing services for small- and medium- sized science and tech enterprises.
　　Fee income recovered due to an active capital market and local　economic recovery. In 2021, BOCHK’s non-interest income fell 13.7% YoY, and net fee income increased 9.5% YoY. The decline in non-interest income was mainly due to the high base effect, driven by a one-off gain from bond sales in 2020. Securities brokerage, credit card, loan commission, and insurance income increased 4.9%, 15.2%, 16.1% and 20.2% YoY, largely due to an active capital market and local economic recovery.
　　High operating efficiency, operating expenses stable. In 2021,BOCHK’s operating expenses rose 0.4% YoY to HK$16.4bn, and the cost- to-income ratio increased 3.5ppt YoY to 33.5%. BOCHK has implemented effective cost control through reducing branch expenses, branch transformation, and electronic statements, in our view. BOCHK’s guidance is the cost-to-income ratio may stay within 35% in the longer term.
　　Credit costs have dropped substantially; quality of exposure to property developers in the Chinese mainland is solid. In 2021,BOCHK’s credit cost fell 5bps YoY to 0.14%, and non-performing loan ratio was largely flat YoY at 0.27%. BOCHK’s exposure to real estate developers was HK$106.5bn at end-2021 (about 2.9% of total assets), and there were no overdue loans. State-owned enterprises account for 77%. The increase in non-performing loans mainly came from the Southeast Asia business. As of end-2021, clients in Southeast Asia accounted for about 3.4% of the firm’s total loans, and the non-performing loan ratio was 2.39%, much higher than the overall level. We expect BOCHK’s credit costs to remain stable in 2022.
　　Financials and valuation
　　We lower our 2022 earnings forecast 3.3% to HK$26.3bn to reflect the negative impact of the fifth wave of pandemic, but raise our 2023 earnings forecast 4.0% to HK$33.1bn due to further economic recovery. BOCHK is trading at 1.0x 2022e and 0.9x 2023e P/B. We maintain OUTPERFORM and our TP of HK$38.50 (1.3x 2022e and 1.3x 2023e P/B), offering 35.3% upside.
　　Risks
　　Disappointing interest rate hikes in Hong Kong SAR; exposure to the real estate industry in the Chinese mainland.