EAST ASIA SECURITIES COMPANY LIMITED 9/F, 10 Des Voeux Road Central, Hong Kong. Dealing: Research: Facsimile:

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1 9/F, 10 Des Voeux Road Central, Hong Kong. Dealing: Research: Facsimile: HONG KONG RESEARCH Analyst: Paul Sham 26 th February CHONG HING BANK LIMITED ( 創興銀行 ) Sector : Banking Executive Director & CEO : Mr. Zhaoxing Zhang HKSE Code : Market Price : HK$14.84 (26/02/2016) Shares Issued : 652.5m Managing Director & : Ms. Leung Ko May Yee Mkt. Cap. : HK$9,683.10m Deputy Chairman 52 weeks Hi/ Lo : HK$27.10/ HK$13.72 HSI : 19, (26/02/2016) Main Business : Banking and related financial services SUMMARY OF THE FINAL RESULTS FOR THE YEAR ENDED 31 ST DECEMBER 2015 Final Results Highlights Vs FY2014 (%) Vs 30/06/2015 (%) Net interest income 1, % Non-interest income % Total operating income 2, % Operating expenses (1,114) +15.3% Operating profit before impairment losses 1, % Allowances for credit and other losses (23) NA Profit before taxation and non-core items 1, % Non-core items % Profit before taxation 1, % Taxation (226) +36.6% Attributable profit to equity holders 1, % Total loans 63, % +2.0% Total deposits 99, % +6.4% Total assets 127, % +10.4% Basic EPS (HK$) % Final DPS (HK$) % Total DPS (HK$) % Selected Ratios FY2015 FY2014 1H2015 Net interest margin 1.53% 1.58% 1.51% Cost-income ratio 48.8% 52.8% 46.1% Return on average assets 1.01% 0.82% 1.30% Return on average equity 10.43% 9.35% 13.15% Impaired loan ratio 0.04% 0.04% 0.05% Impaired advances coverage % % 891.5% Loan-deposit ratio 63.8% 67.6% 66.5% Common Equity tier 1 CAR 12.6% 9.6% 8.7% Tier 1 CAR 15.2% 12.8% 11.4% Total CAR 17.7% 15.9% 14.1% Operations continued to improve Chong Hing Bank (CHB) reported 2015 full-year net profit of HK$1,193m, down 56.5% y-o-y. Excluding the disposal gains of HK$1,961m from the sale of Chong Hing Bank Centre in FY14, net profit should have increased by 51% y-o-y, translating into annualized return on equity of 10.43% (vs 9.35% in FY14). Key highlights in the results included aggressive balance sheet expansion, a significant increase in cross-border lending, strong fee income from securities trading and an industry-low level of non-performing loans at just 0.04%. CHB raised the fullyear dividend to HK$0.62 accordingly for FY15, up 19.2% y-o-y. This report has been prepared solely for information purposes and we, East Asia Securities Company Limited 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. This document is based upon information, which we consider reliable, but accuracy and completeness are not guaranteed. Opinions expressed herein are subject to change without notice. At the time of preparing this report, we have no position in securities of the company or companies mentioned herein, while other Bank of East Asia Group companies may from time to time have interests in securities of the company or companies mentioned herein.

2 EAST ASIA SECURITIES COMPANY LIMITED Net interest income jumped 29.7% y-o-y to HK$1,779m, as total assets grew by 18% with advances to customers increasing by 12%, outperforming y-o-y decline for most listed peers. Strong demand was seen in manufacturing sector (+42.6%), transportation (+71.2%) and loans outside HK (+49.8%). China loans recorded a y-o-y surge of 1.9 times while Macau loans also jumped by 107% y-o-y in Nevertheless, net interest margin narrowed 5bps y-o-y to 1.53%, mainly due to the increased competition for customer deposits in Hong Kong. The net interest margin was also lower in China as a result of interest rate cuts by PBoC. Non-interest income rose 9.6% y-o-y to HK$502m, on the back of 36% y-o-y growth in net fee income. The increase in net fee income was supported by strong securities dealing income, particularly in the first half of 2015 when the stock market turnover was much higher than last year. Fee income from agency services also rose by 51% y-o-y to HK$49m through the sale of life insurance and wealth management products to customers. Yet, net trading income decreased by 47% y-o-y to HK$53m primary due to a reduction in net trading income from foreign exchange swap. Operating expenses increased by 15.3% y-o-y to HK$1,114m, largely due to the 21% y-o-y increase in total staff cost, as CHB recruited more headcount for the development of its business network in both Hong Kong and Mainland. As overall operating income growth was ahead of increase in expenses, cost to income ratio dropped by 4ppts from 52.8% to 48.8%. Asset quality CHB continued its ultra-prudent policy on the credit control during Impaired loan ratio maintained at the historical low of 0.04% at end-2015, which was the lowest level among peers. Provision coverage also stood at an exceptionally high level of 1087%, and again, topped peers. Compared with the net write-back of HK$32m on asset impairment in 2014, CHB recorded a net charge of HK$23m in Capital position CET1 CAR ratio and total CAR ratio rose sharply to 12.6% and 17.7% respectively at end-2015, from 9.6% and 15.9% a year ago, as CHB completed a rights issue in September 2015 and raised HK$3,676m of new capital. Outlook & Prospect Catching up with peers CHB had long been at the bottom of the league among Hong Kong-based listed banks in terms of ROE before the takeover by Yue Xiu Group. After the takeover, CHB s profitability was indeed catching up with peers. Thanks to the active expansion in loan portfolio by increasing business referral and linkages to China, CHB s ROE improved from 7.40% in FY13 to 10.43% in FY15, which became comparable to Hang Seng s 13.8%. With the help of the current Management team and Yue Xiu Group, the catch-up trend is expected to last for a couple of years. Rapid expansion in China CHB s intention to aggressively expand the Mainland market goes against the tide of a wave of Hong Kong-listed banks that are now trying to shrink the sizes of their balance sheets so as to limit the damage from Mainland bad debt. CHB said it will set up its mainland headquarters in Guangzhou in March or April and add two branches in Guangzhou and Hengqin this year. In addition, CHB will hire 100 employees in Mainland China while continuing its recruitment in Hong Kong as part of its expansion plans in the city and the Pearl River Delta region. Therefore, we believe the rapid expansion in China or business injection by its parent company will continue to be the key earnings drivers in Early sign of asset quality deterioration Despite an exceptionally low impaired loan ratio reported in FY15 results, CHB s total overdue advances surged by 7.1 times during Although the overdue loan balance represent only 0.6% of total advances and were well covered by collateral, we see it as an early sign of asset quality deterioration, especially CHB s recent aggressive expansion in China. Fortunately, CHB s high coverage ratio should provide CHB enough cushions to absorb potential loan impairment loss. Valuation Given its relatively low loan-to-deposit ratio, CHB should be able to boost the interest income further by deploying more free fund to interest-earning assets. Its exceptionally low impaired loan ratio and high coverage ratio should provide CHB enough cushions to absorb potential loan impairment loss. Therefore, we believe CHB should be able to maintain its growth momentum in the coming one or two years. Trading at FY15 P/B of 0.64x, CHB s valuation is currently the lowest in the local banking sector and we recommend a Buy rating on the counter. Recommendation: Buy 2

3 Appendix I I. Impairment allowances, overdue and rescheduled advances of Chong Hing Bank As % of total customer advances Individual allowance Portfolio Non-performing allowance loans Overdue and rescheduled advances As of 31/12/ % 0.39% 0.04% 0.60% As of 30/6/ % 0.38% 0.05% 0.45% As of 31/12/ % 0.42% 0.04% 0.10% II. Comparison of Chong Hing Bank s loan book: 31/12/2015 vs 31/12/2014 Loans-by industry 31 st Dec, 2015 Up/(down) 31 st Dec, 2014 Property related 9, % 9,192 Financial concerns 3, % 3,408 Wholesale & retail trade 2, % 2,416 Manufacturing 2, % 2,020 Transport & transport equipment 1, % 866 Residential mortgages, HOS/PSPS 8, % 7,824 Credit card % 102 Others 11, % 10,510 Trade finance 5, % 8,767 Stockbrokers 1, % 1,461 Loans outside HK 15, % 10,359 63, % 56,926 III. Comparison of Chong Hing Bank s loan book: 31/12/2015 vs 30/06/2015 Loans-by industry 31 st Dec, 2015 Up/(down) 30 th Jun, 2015 Property related 9, % 8,827 Financial concerns 3, % 3,440 Wholesale & retail trade 2, % 2,277 Manufacturing 2, % 3,058 Transport & transport equipment 1, % 914 Residential mortgages, HOS/PSPS 8, % 8,190 Credit card % 75 Others 11, % 9,819 Trade finance 5, % 8,838 Stockbrokers 1, % 2,196 Loans outside HK 15, % 14,700 63, % 62,333 3

4 Appendix II Breakdown of loan book of Chong Hing Bank Breakdown of Loan Book as of 31/12/2015 Total customer advances: HK$63,600 million Loans outside HK 24.4% Property related 14.7% Financial concerns 6.1% Whoelsale & retail trade 4.4% Stockbrokers 2.6% Trade finance 8.9% Manufacturing 4.5% Others 18.5% Credit card 0.2% Residential mortgages, HOS/PSPS/TPS 13.4% Transport and transport equipment 2.3% Breakdown of Loan Book as of 31/12/2014 Total customer advances: HK$56,926 million Loans outside HK 18.2% Property related 16.1% Financial concerns 6.0% Stockbrokers 2.6% Trade finance 15.4% Others 18.5% Whoelsale & retail trade 4.2% Credit card 0.2% Residential mortgages, HOS/PSPS/TPS 13.7% Transport and transport equipment 1.5% Manufacturing 3.5% 4

5 Important Disclosure / Analyst Certification / Disclaimer This document is published by East Asia Securities Company Limited, a wholly-owned subsidiary of The Bank of East Asia, Limited (BEA). The research analyst primarily responsible for the content of this report, in part or in whole certifies that the views on the companies and their securities mentioned in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. This report has been prepared solely for information purposes and has no intention whatsoever to solicit any action based upon it. Neither this report 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 East Asia Securities Company Limited considers reliable, but accuracy or completeness is not guaranteed. Information and opinions expressed herein reflect a judgment as of the date of this document and are subject to change without notice. Any recommendation contained in this report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This report is not to be taken in substitution for the exercise of judgment by respective readers of this report, who should obtain separate legal or financial advice. East Asia Securities Company Limited and / or The BEA Group accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or further communication given in relation to this report. At time of this report, East Asia Securities Company Limited has no position in securities of the company or companies mentioned herein the report, while BEA along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this report. BEA and its associates, its directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. BEA and/or any of its affiliates may beneficially own a total of 1% or more of any class of common equity securities of the subject company or companies mentioned in this report and may, within the past 12 months, have received compensation and/or within the next 3 months seek to obtain compensation for investment banking services from the subject company or companies mentioned in the report. This document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of, or located in, any locality, state, country or other jurisdiction, publication, availability or use would be contrary to law and regulation. 5