HANG SENG BANK LIMITED ( 恒生銀行 )

Transcription

1 9/F, 10 Des Voeux Road Central, Hong Kong. Dealing: Research: Facsimile: HONG KONG RESEARCH 2 nd August 2005 HANG SENG BANK LIMITED ( 恒生銀行 ) Sector : Banking Chairman : Mr. Michael R. P. Smith HKSE Code : 0011 Market Price : HK$107.9 (02/08/2005) Vice-Chairman & Chief Executive : Mr. Raymond C. F. Or Shares Issued : 1, million Mkt. Cap. : HK$206,287.8 million Managing Director & 52 weeks Hi/Lo : HK$ / HK$98.75 Deputy Chief Executive : Mr. Joseph C. Y. Poon HSI : 15, (02/08/2005) Main Business : Banking and related financial services SUMMARY OF THE INTERIM RESULTS FOR THE SIX MONTHS ENDED 30TH JUNE 2005 Interim Results Highlights Vs 1H2004 (%) Vs FY2004 (%) Net interest income 5, % Non-interest income 5, % Total operating income 10, % Net insurance claims incurred and movement in (2,409) +51.1% policyholder liabilities Net operating income before loan impairment 8, % Loan impairment (charges)/releases and other (302) % credit risk allowances Operating expense (2,156) +8.8% Attributable profit 6, % Total loans 261, % +3.6% Total deposits 430, % -3.8% Total assets 569, % +4.2% EPS (HK$) HK$ % 1 st and 2 nd interim DPS (HK$) HK$2.20 Unchanged Selected Ratios 1H2005 1H2004 FY2004 Net interest margin 2.13% 2.02% 2.04% Gross impaired loans as a % of customer advances 0.7% 1.4% 0.7% Loans impairment allowances as a % of gross impaired loans 39.1% 23.8% 40.3% Return on average assets 2.2% 2.5% 2.2% Return on average equity 29.7% 32.0% 27.6% Loan-deposit ratio 56.8% 57.6% 54.3% Cost-income ratio 26.7% 24.6% 26.3% Total capital ratio 12.4% 12.8% 12.0% Tier 1 capital ratio 10.5% 11.6% 10.8% Average liquidity ratio 43.6% 48.1% 47.2% 1H2005 results exceeded market expectations Hang Seng Bank ( HSB ) reported a 2.3% y-o-y fall in net profit to HK$6,045 million for 1H2004 on declines in fund sales and investment income. Nevertheless, the results, under new accounting policies, exceeded market expectations of HK$5,535 million, helped by improved interest spreads on deposits and a HK$877 million revaluation gain on property investment. This report has been prepared solely for information purposes and we are not soliciting any action based upon it. Neither this document nor its contents shall be construed as an offer, invitation, advertisement, inducement or representation of any kind or form whatsoever. The information is based upon information which we consider reliable, but accuracy or completeness is not guaranteed. Opinions expressed herein are subject to change without notice. At time of this report, East Asia Securities Company Limited has no position in securities of the company or companies mentioned herein.

2 Improved net interest margin Net interest income grew 11.6% y-o-y to HK$5,264 million, as rising interest rates in 2Q2005 improved interest spreads on deposits and enhanced contributions from net free funds. Net interest margin widened 11 bps from last year s 1 st half to 2.13% with increases of net interest spread of 4 bps to 1.99% and contribution from net free funds of 7 bps to 0.14%. Nevertheless, treasury securities investment and money market portfolios were negatively affected by the flattening of the yield curves. Modest loan growth Total loans expanded 3.6% h-o-h to HK$261.7 billion. Lending to the industrial, commercial and financial sectors grew 5.2% h-o-h. Of which, wholesale, retail and manufacturing together were up 32.2% h-o-h. Lending to individuals rose a mere 0.2% h-o-h, with property-related loans down 0.9% h-o-h. Trade finance advanced 8.8% h-o-h, while loans for use outside Hong Kong increased 17.4% h-o-h due to growth in lending activities in the Mainland. As total deposits including CDs and other debt securities issued dropped 3.8% h-o-h to HK$458.9 million, the loan-to-deposit ratio edged up to 56.8% as of 30/06/2005 from 54.3% as of 31/12/2004. Fee and trading income dropped Net fee income fell 16.2% y-o-y to HK$1,741 million, undermined by declining fund sales and a change in accounting treatment of credit facilities fees as interest income instead of fee income. Income from retail investment products and funds under management dropped 22.9% y-o-y, as compared to the unexceptionally high capital guaranteed fund sales in 1H2004. Trading income fell 22.4% y-o-y to HK$433 million, primarily due to a HK$253 million fall in foreign exchange dealing profits that included a HK$147 million revaluation loss of foreign exchange contracts used for hedging on-balance sheet positions. Slightly higher cost-to-income ratio Operating expenses went up 8.8% y-o-y to HK$2,156 million, largely attributable to the rise in personnel expenses. Expansion in Personal Financial Services and the Mainland network contributed to a 9.0% y-o-y increase in staff salaries. Increases in IT investment and marketing expenditure for card and insurance products also accounted for a 12.2% y-o-y rise in general and administrative expenses. The cost-to-income ratio was 26.7%, higher than 24.6% for 1H2004 but lower than 28.1% for 2H2004. After all, the number remains low in comparison with other local peers. Loan impairment charges A net loan impairment charge of HK$302 million was recorded in 1H2005, compared with a net release of HK$746 million in 1H2004. A net charge of HK$95 million on individually assessed loans was resulted from loan impairment allowances for certain Commercial Banking accounts, while charges on collectively assessed loans amounted to HK$207 million following an update of the historical loss rate. As of 30/06/2005, gross impaired loans amounted to HK$1,946 million with loans impairment allowances as a percentage of gross impaired loans at 39.1% (31/12/2004: 40.3%). Solid financial position HSB continued to maintain a strong liquidity position, with an average liquidity ratio of 43.6% (1H2004: 48.1%; 2H2004: 46.3%). As of 30/06/2005, the total capital ratio was 12.4% (30/06/2004: 12.8%; 31/12/2004: 12.0%) and the tier 1 capital ratio was 10.5% (30/06/2004: 11.6%; 31/12/2004: 10.8%). Average equity increased 5.6% y-o-y to HK$39.4 billion in 1H2005. The return on average equity (ROAE) was 29.7%, compared with 32.0% in 1H2004. Outlook & Prospects Fee income on a down trend Fee income dropped significantly in 1H2005 as contributions from fund sales were declining, especially for the capital guaranteed funds which the bank heavily relied on to achieve growth last year. We expect growth in fee incomes to remain challenging in 2H2005, as rising interest rates have changed the customers risk appetites for capital guaranteed funds. The bank said it would dedicate more to yield enhanced products to better capture the market opportunities. 2

3 Pressure on income from Treasury portfolios In general, we see HSB as one of the major beneficiaries of rising interest rates net interest margin widened 11 bps in 1H2005. The only concern is that rising interest rates would also exert pressure on income from Treasury investment portfolios, which dropped 31.5% y-o-y in 1H2005, and would hold back the bank s overall profit in 2H2005. Positive results from Industrial Bank The investment in HSB s 15.98%-owned Fujian-based Industrial Bank is yielding positive results, which contributed approximately HK$190 million to the bank s net profit in 1H2005. Rich valuation At 4.8x 2005E P/B and 17.8x 2005E P/E, the counter is trading at a huge premium over other local peers. While the valuation seems rich, its high franchise value, superior ROAE of 29.7% and dividend yield of 4.8% should provide considerable support to its share price. Recommendation: Hold 3

4 Appendix 1 I. Loans impairment allowances as a percentage of total customer advances As % of total customer advances Individually assessed Collectively assessed Gross impaired loans Overdue and rescheduled advances As of 30/06/ % 0.18% 0.7% 0.5% As of 31/12/ % 0.12% 0.7% 1.1% As of 30/06/ % 0.17% 1.4% 1.7% II. Comparison of Hang Seng Bank s loan book: 30/06/2005 Vs 31/12/2004 Loans-by industry 30 th Jun, 2005 Up/(down) 31 st Dec, 2004 Property related 57, % 57,550 Financial concerns 4, % 3,996 Wholesale & retail trade 5, % 5,460 Manufacturing 7, % 4,384 Transport & transport equipment 12, % 11,173 Residential mortgages, HOS/PSPS 106, % 106,373 Credit card 6, % 6,534 Others 30, % 29,132 Trade finance 16, % 15,539 Stockbrokers % 314 Loans outside HK 14, % 12, , % 252,564 ======== ======== III. Comparison of Hang Seng Bank s loan book: 30/06/2005 Vs 30/06/2004 Loans-by industry 30 th Jun, 2005 Up/(down) 30 th Jun, 2004 Property related 57, % 53,869 Financial concerns 4, % 4,819 Wholesale & retail trade 5, % 5,107 Manufacturing 7, % 3,733 Transport & transport equipment 12, % 11,416 Residential mortgages, HOS/PSPS 106, % 108,917 Credit card 6, % 5,508 Others 30, % 27,827 Trade finance 16, % 15,807 Stockbrokers % 372 Loans outside HK 14, % 10, , % 247,615 ======== ======== 4

5 Appendix II Breakdown of loan book of Hang Seng Bank Stockbrokers 0.11% Trade finance 6.46% Others 11.81% Breakdown of loan book as of 30/06/2005 Total customer advances: HK$261,713 million Loans outside HK 5.43% Property related 21.79% Financial concerns 1.68% Credit card 2.52% Wholesale & retail trade 1.79% Manuf acturing 2.97% Residential mortgages, HOS/PSPS 40.60% Transport & transport equipment 4.62% Others 11.53% Credit card 2.59% Stockbrokers 0.12% Trade finance 6.15% Breakdown of loan book as of 31/12/2004 Total customer advances: HK$252,564 million Loans outside HK 4.79% Property related 22.79% Financial concerns 1.58% Wholesale & retail trade 1.83% Manuf acturing 1.74% Residential mortgages, HOS/PSPS 42.12% Transport & transport equipment 4.42% 5