9/F, 10 Des Voeux Road Central, Hong Kong. Dealing: 3608 8000 Research: 3608 8097 Facsimile: 3608 6132 HONG KONG RESEARCH Analyst: Paul Sham 8 th March 2012. CHONG HING BANK LIMITED ( 創興銀行 ) Sector : Banking Executive Chairman : Dr. Liu Lit Mo HKSE Code : 01111 Market Price : HK$14.08 (08/03/2012) Managing Director & CEO : Mr. Liu Lit Chi Shares Issued : 435m Mkt. Cap. : HK$6,124.8m 52 weeks Hi/ Lo : HK$20.20 / HK$13.02 HSI : 20,900.73 (08/03/2012) Main Business : Banking and related financial services SUMMARY OF THE FINAL RESULTS FOR THE YEAR ENDED 31 ST DECEMBER 2011 Final Results Highlights Vs FY2010 (%) Vs 30/06/2011 (%) Net interest income 815-0.1% Non-interest income 499 +14.7% Total operating income 1,315 +5.1% Operating expenses (774) +8.7% Operating profit before impairment losses 541 +0.3% Impairment reversal on loans and advances 107-702.7% Profit before taxation 668 +17.5% Taxation (108) +17.4% Attributable profit to shareholders 559 +17.5% Total loans 41,338 +9.0% +1.5% Total deposits 66,361 +4.5% +9.0% Total assets 77,446 +4.2% +5.3% Basic EPS (HK$) 1.29 +18.3% Final DPS (HK$) 0.35 +0.0% Total DPS (HK$) 0.50 +11.1% Selected Ratios FY2011 FY2010 1H2011 Net interest margin 1.17% 1.21% 1.11% Cost-income ratio 58.8% 56.9% 50.4% Return on average assets 0.74% 0.66% 0.84% Return on average equity 8.32% 7.55% 12.32% Impaired loan ratio 0.19% 0.09% 0.21% Impaired advances coverage 271.9% 411.8% 216.5% Loan-deposit ratio 62.3% 59.7% 66.9% Core CAR 10.6% 11.2% 10.8% Total CAR 15.4% 17.9% 16.9% Average liquidity ratio 42.4% 45.2% 41.8% FY11 results above market expectations Chong Hing Bank (CHB) recorded FY11 net profit of HK$559m, up 17.5%. This was above the market forecast of HK$483m. CHB s earning surprise was attributable to the write-backs in relation to Minibonds Repurchase Scheme and the impairment reversal from a delinquent borrower. Excluding the impact of write-backs and impairment reversal, operating profit would have fallen 53.8% y-o-y. Dividend CHB proposed 2H2011 dividend of HK$0.35, making up 2011 total dividend to HK$0.50, up 11.1% y-o-y, and translating into a dividend payout ratio of 38.8% (FY10: 41.3%). 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.
Net interest income Net interest income was flat at HK$815m as the 9.2% increase in total loans, driven by overseas loans (+13.8% y-o-y) and trade finance (+39.0% y-o-y), was offset by narrowed net interest margin (NIM). CHB s NIM was compressed by 4bps y-o-y to 1.17%, as interest expense rose amid competitive pricing on time deposits offered by other banks, which was more than offset the increase in interest income arising from higher HIBOR rate. Non-interest income Net fees income fell 3.6% y-o-y as securities brokerage fees, the main component of CHB s fee income, were disappointing during FY11, down 16.8% y-o-y as sentiment of the local stock market was impacted by sovereign debt crisis of various European countries. Credit card fee, the second largest contributor for fee income, rose 14.8% y-o-y as China Unionpay merchants continued to record an admirable y-o-y growth of 50%. During FY11, CHB recorded net losses of HK$102m on financial instruments as the credit spreads on Hong Kong and mainland China debt securities had widened resulting in revaluation losses. Despite unexciting fee income growth and the revaluation losses on financial instruments, the overall non-interest income was lifted by the recovery of amounts (HK$235m) previously written-offs in relation to Lehman Brothers Minibonds. Costs Operating expenses rose 8.7% y-o-y, with staff costs and rental expense rising 7.0% and 6.9% y-o-y respectively. Owing to the sluggish top-line growth, CHB s cost-income ratio deteriorated to 58.8% for FY11 from 56.9% for FY10. Asset quality An amount of HK$170m was recovered by CHB from a delinquent borrower who agreed to repay a secured loan that was previously written-off by CHB. As a result, CHB made an impairment reversal of HK$107m during FY11. Nevertheless, asset quality of loans and advances deteriorated in 2011, with impaired loan ratio up slightly to 0.19% at end-2011 which remained the lowest level among peers. Provision coverage also fell substantially from 412% at end-2010 to 272% at 2011 but once again, topped peers. Profitability and financial position CHB s ROE improved to 8.32% in FY11 from 7.55% a year earlier on write-backs from Lehman Mininbonds and impairment reversal. Nevertheless, excluding the above favourable impacts, CHB s profitability remained at the bottom of the league among other Hong Kongbased listed banks. On the other hand, CHB redeemed the entire outstanding amount of US$125m floating rate subordinated notes due 2016 in full in December 2011, resulting in weakened total CAR of 15.4% at end-2011 (16.9% at end-2010). Outlook & Prospects Unappealing outlook All in All, CHB s FY11 results were dissatisfactory as the sluggish top-line growth was prettified by the write-backs from Lehman Minibonds and impairment reversal. Improvement was not seen on h-o-h basis either, with some 11% rebound in net interest income driven by wider spread on free fund being offset by a 9% fall in net fee income. Other non-interest income also plunged 30% on trading loss. Looking into 2012, brokerage income may see a turnaround in 1H12 on improving market sentiment. However, headwind on earnings should be expected in the absence of Lehman Minibond write-backs. Slow overseas expansion CHB has only one branch in Shantou, Guangdong, one branch in Macau and one branch in San Francisco. Unlike other HK banks, CHB s overseas expansion is relatively sluggish in the recent years. By focusing on the saturated HK banking business, CHB s growth potential and long-run profitability should be far behind other HK peers with overseas operations. M&A is likely Management revealed in 2010 that they would actively consider any M&A offer from potential bidder. On the other hand, for the past few years, CHB s asset quality was improved deliberately by lowering impaired loan ratio and increasing both the coverage ratio and CAR ratio. Given the fact that CHB lacks the ambition and clear strategies to differentiate and compete in the highly competitive Hong Kong market, it is believed that the probability of CHB being acquired should be the highest among local banks. Unattractive valuation but upside potential on M&A theme CHB has long been the weakest bank among the local peers, in terms of profitability and China exposure. Trading at FY12E P/B of 0.83x and FY12E P/E of 15.9x, we consider CHB overvalued, given its relatively lacklustre single-digit ROEs for years. However, speculations over its M&A theme cannot be ignored and we therefore recommend a Neutral rating on the counter. Recommendation: Neutral 2
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 31/12/2011 0.10% 0.42% 0.19% 0.77% As of 30/6/2011 0.12% 0.33% 0.21% 1.10% As of 31/12/2010 0.06% 0.33% 0.09% 0.87% II. Comparison of Chong Hing Bank s loan book: 31/12/2011 vs 31/12/2010 Loans-by industry 31 st Dec, 2011 Up/(down) 31 st Dec, 2010 Property related 11,186 +15.6% 9,679 Financial concerns 2,429 +7.7% 2,256 Wholesale & retail trade 1,562 +33.7% 1,168 Manufacturing 1,616 +17.5% 1,375 Transport & transport equipment 882-21.2% 1,118 Residential mortgages, HOS/PSPS 6,987 +2.9% 6,789 Credit card 76-25.5% 102 Others 9,704 +4.3% 9,301 Trade finance 1,183 +39.0% 851 Stockbrokers 578-25.5% 776 Loans outside HK 5,137 +13.8% 4,512 41,338 +9.0% 37,928 III. Comparison of Chong Hing Bank s loan book: 31/12/2011 vs 30/06/2011 Loans-by industry 31 st Dec, 2011 Up/(down) 30 th Jun, 2011 Property related 11,186 +10.2% 10,154 Financial concerns 2,429-5.9% 2,582 Wholesale & retail trade 1,562-1.0% 1,578 Manufacturing 1,616-3.6% 1,676 Transport & transport equipment 882-7.6% 954 Residential mortgages, HOS/PSPS 6,987 +1.9% 6,857 Credit card 76 +10.3% 69 Others 9,704 +1.6% 9,549 Trade finance 1,183 +7.1% 1,105 Stockbrokers 578-51.6% 1,193 Loans outside HK 5,137 +2.5% 5,009 41,338 +1.5% 40,726.0 3
Appendix II Breakdown of loan book of Chong Hing Bank Breakdown of Loan Book as of 31/12/2011 Total customer advances: HK$41,338 million Stockbrokers 1.4% Loans outside HK 12.4% Property related 27.1% Trade finance 2.9% Financial concerns 5.9% Others 23.5% Credit card 0.2% Residential mortgages, HOS/PSPS/TPS 16.9% Transport and transport equipment 2.1% Whoelsale & retail trade 3.8% Manufacturing 3.9% Breakdown of Loan Book as of 31/12/2010 Total customer advances: HK$37,928 million Stockbrokers 2.0% Loans outside HK 11.9% Property related 25.5% Trade finance 2.2% Financial concerns 5.9% Others 24.5% Credit card 0.3% Residential mortgages, HOS/PSPS/TPS Transport and 17.9% transport equipment 2.9% Whoelsale & retail trade 3.1% Manufacturing 3.6% 4
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