Hang Seng Bank (HSB) reported 1H16 results on Wednesday afternoon. 1H16earnings came in slightly below the run rate of our full-year forecasts and Streetconsensus due to weaker PPOP and higher credit costs. We revise down ourearnings forecasts by 7/7% for FY16/17 and retain our Neutral rating with a newPT of HK$142 by moving forward the valuation base to Dec-17.
Group 1H16 profits of HK$8bn were down 60% YoY, or down 15% YoY ifexcluding the HK$10.6bn divestment gains related to Industrial Bank, andimply an annualized ROE of 12.4%. Both PPOP and credit costs are slightlyworse than our expectation.
What was positive: NIM migration better than feared and capital positionremains solid. NIM of 1.85% in 1H16 was down 1bp YoY but up 5bps HoHdue to better interest spreads (up 2bps YoY and 5bps HoH) on the back ofimproving funding structure (CASA ratio increased to 75%) and better treasuryoperation at HSB (China). Capital position remains solid post the specialdividends, with tier1/CET1 ratios at 16.8%/18.1% helped by lower RWA andrelease of regulatory reserves (a deduction of CET1 capital).
What was negative: loan contraction and worse-than-expected asset qualitydeterioration. Loan book contracted 2% HoH as management attributed tosluggish cross-border/trade finance flows and early repayment and does notexpect meaningful recovery in 2H16. Impaired loan ratio went up to 0.55% from0.4% in 2H15 as asset quality deteriorated at both HK (0.38% vs. 0.29%) andChina (1.66% vs. 0.85%) during the period, while overdue loans over threemonths also increased 21% HoH. Management guided impaired loans in Chinaare related to SOE restructuring while those in HK are still well covered bycollaterals, in response to the declining coverage ratio.
Retain Neutral. Our PT is based on 1.8x FY17E P/B; we continue to like thedefensive nature of HSB but believe current valuation has largely priced in suchpremium given only 12-13% ROE outlook with limited upside potential onunderlying operation or capital management. We see more attractive risk-rewardat HK$125 (implying 1.6x P/B).
