1H22 results in line with our forecasts
BOC Hong Kong (BOCHK) announced 1H22 results: Revenue rose 8.7% YoY to HK$27.23bn, and net profit dropped 7.1% YoY to HK$13.47bn, in line with our expectations. Considering the large upside in the bank’s net interest margin (NIM), sound asset quality and that net profit may improve notably, the firm remains our top pick in the sector.
Trends to watch
NIM rebounded markedly. In 1H22, adjusted net interest income increased 8.7% YoY, with adjusted NIM up 3bp YoY and 5bp QoQ to 1.13%. In 2Q22, adjusted NIM rose 11bp QoQ to 1.19%, mainly driven by a sharp rise in HIBOR in 2Q22, and the bank’s efforts to improve asset structure. The adjustment to the calculation method of NIM was mainly reflected in shifting the income of foreign exchange swap contracts from net trading income to interest income. In light of the further increase in HIBOR over July–August, we expect BOCHK’s NIM to continue improving in 2H22, and full-year adjusted NIM could rise 12bps YoY to 1.21%.
Leads industry in terms of loan expansion. Loans by BOCHK increased 5.1% vs. in early 2022 (industry average in Hong Kong SAR was 0.8%), indicating the bank outperformed its peers in terms of loan expansion. Given soft credit demand in the Hong Kong market, the bank’s full year loan growth target was lowered from mid-to-high-single digits to mid-single digit growth, and its loan balance could stay flat HoH in 2H22.
Fee income weakened as expected; net trading income climbed YoY. In 1H22, BOCHK’s net fee income decreased 22.7% YoY. Revenue from securities brokerage, funds distribution and insurance fell 36.6%, 38.0% and 24.3% YoY, mainly dragged by weak investor sentiment and the impacts of the COVID-19 pandemic. In addition, fee expense increased 15.1% YoY, mainly due to a notable rise in sales income of BOC Life’s broker and tied agency channels. In 1H22, adjusted investment income jumped 226.9% YoY to HK$6.68bn, mainly driven by income of interest rate swaps. BOC Life’s debt securities investments incurred fair value losses amid rising interest rates, negatively affecting the bank’s non-interest income by HK$1.47bn.
Manageable exposure to Chinese mainland real estate sector; sound asset quality. At end-1H22, NPL ratio rose 17bp YoY to 0.46%, and credit cost rose 6bp YoY to 0.21%, mainly due to the bank’s risk exposure to the Chinese mainland real estate sector. As at the end of 1H22, loans originated to the Chinese mainland real estate sector were HK$102.9bn (or 6.1% of total loans), down 2.7% vs. early-2022, with SOE and private sector clients accounting for 78% and 22% of the loans. Under the “three red lines” policy, green-grade and yellow-grade clients accounted for 81% and 19% of the loans originated to the Chinese mainland real estate sector, and by rating of the clients, investment-grade clients accounted for 71% of the loans. As at the end of 1H22, NPL ratio and special mention loan ratio of loans granted to Chinese mainland real estate companies stood at 3.5% and 0.8%. We project its full year credit cost will rise 5bp YoY to 0.18%, and overall risk exposure to the Chinese mainland real estate sector will be manageable, mainly backed by its SOE-dominated customer structure and prudent risk control.
Financials and valuation
We raise our 2022 earnings forecast by 3.1% to HK$28.58bn given the faster-than-expected improvement in interest margin, and maintain 2023 earnings forecast. The stock is trading at 0.9x 2022 and 0.9x 2023 P/B. We maintain OUTPERFORM and our TP of HK$38.50 (1.3x 2022 P/B and 1.3x 2023 P/B), offering 41.3% upside from the current price.
Risks
Disappointing interest rate hikes in Hong Kong SAR; exposure to the real estate industry in the Chinese mainland.