9/F, 10 Des Voeux Road Central, Hong Kong. Dealing: 3608 8000 Research: 3608 8097 Facsimile: 3608 6113 HONG KONG RESEARCH Analyst: Paul Sham 7 th March 2014. WING HANG BANK LIMITED ( 永亨銀行 ) Sector : Banking Chairman & Chief Executive : Dr. Patrick Y. B. Fung HKSE Code : 00302 Market Price : HK$116.50 (07/03/2014) Deputy Chief Executive Mr. Frank Wang Shares Issued : 307m Mkt. Cap. : HK$35,766m 52 weeks Hi/ Lo : HK$124.70 / HK$67.70 HSI : 22,660.49 (07/03/2014) Main Business : Banking and related financial services SUMMARY OF THE FINAL RESULTS FOR THE YEAR ENDED 31 ST DECEMBER 2013 Final Results Highlights Vs FY2012 (%) Vs 30/06/2013 (%) Net interest income 3,338 +13.0% Non-interest income 962 +2.7% Total operating income 4,301 +10.5% Operating expenses (2,236) +20.8% Operating profit before impairment losses 2,065 +1.3% Net reversal/(charge) of loan impairment allowance (86) -62.8% Profit before taxation and non-core items 1,978 +9.5% Non-core items 577 +84.5% Profit before taxation 2,556 +20.6% Taxation (368) +16.1% Attributable profit to shareholders 2,187 +21.3% Total loans 135,323 +18.6% +10.3% Total deposits 182,096 +8.1% +6.7% Total assets 214,376 +8.6% +6.6% Basic EPS (HK$) 7.17 +19.5% Final DPS (HK$) 1.62 +0.0% Total DPS (HK$) 2.08 +0.0% Selected Ratios FY2013 FY2012 1H2013 Net interest margin 1.71% 1.62% 1.69% Cost-income ratio 52.0% 47.6% 49.6% Return on average assets 1.06% 0.94% 1.01% Return on average equity 10.6% 9.8% 10.1% Impaired loan ratio 0.44% 0.45% 0.36% Impaired advances coverage 47.3% 66.1% 63.0% Loan-deposit ratio 74.3% 67.7% 71.9% Common Equity tier 1 CAR 12.0% NA 10.8% Tier 1 CAR 12.0% 10.0% 10.8% Total CAR 15.9% 15.7% 16.5% Average liquidity ratio 38.6% 38.6% 39.4% FY13 ahead of market estimates Wing Hang Bank ( WHB ) reported a record profit of HK$2,187m in 2013, up 21.3% y-o-y, which was higher than market consensus of HK$2,071m. The sharp rise in net profit was boosted by better net interest income, lower credit costs and capital gains on disposals of its office building in Wanchai. Despite higher earnings, Wing Hang Bank maintained the dividend at HK$2.08 per share in 2013, representing a lower dividend payout ratio of 29.0% (2012: 34.7%). 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 increased by 13.0% to HK$3,338m, supported by the expansion in both loan portfolios and net interest margin (+9bps y-o-y to 1.71%). Total loans increased by 18.6% y-o-y, thanks to a broad-based growth in most sectors, notably in wholesale & retail trade (+109%), overseas loans (+22.3%) and residential mortgages (+14.2%). Owing to the slower pace in deposit growth, WHB s loan-to-deposit ratio rose to 74.3% accordingly at end-2013, from 67.7% a year earlier. Non-interest income increased 2.7% y-o-y to HK$962m. Net fee income rose 5.0% y-o-y to HK$846m, supported by higher insurance (+12% y-o-y), credit card (+12%) and brokerage commissions (+18%). The overall non-interest income was dragged by lower net gains from trading and financial instruments designated at fair value, which fell by 6.6% to HK$117m. Operating expenses jumped 20.8% y-o-y to HK$2,236m, a relatively fast pace among peers. Staff cost increased 12.8% y-o-y due to the pay rise and additional headcounts in 2013 (3,446 staff at end- 2013 vs 3,394 at end-2012). On the other hand, other expenses surged 104% y-o-y to HK$384m, attributable to the one-off expenses, likely relating to the legal and advisory fees on M&A. During the year, WHB s cost-to-income ratio rose to 52.0% from 47.6% a year earlier. Asset quality Impairment charges fell sharply by 62.8% y-o-y to HK$86m in 2013. Asset quality remained robust in Hong Kong and Macau, with impaired loan ratio standing at low levels of 0.17% and 0.27% respectively. Impaired loan ratio in China edged up slightly by 5bps y-o-y to 1.54% (vs BEA s 0.49%). Overseas operations Pre-tax profit from China operations registered a stellar growth of 57.8% to HK$171m, thanks to the 74.1% y-o-y reduction in impairment losses. Wing Hang Bank (China) did not open additional outlet in China and maintained its branch network at 15 in 2013. On the other hand, operations in Macau regained its momentum during the year, with its pre-tax profit rising 31.8% y-o-y to HK$396m, as the gaming and tourism industries flourish. WHB added one branch in 2013, bringing the total number of branches in Macau to 13. Pre-tax profit by geographical segment FY2013 FY2012 () (%) () (%) y-o-y (%) Hong Kong 1,949 77.5% 1,678 80.4% +16.2% China 171 6.8% 108 5.2% +57.8% Macau 396 15.7% 300 14.4% +31.8% Total 2,516 100.00% 2,086 100.00% +20.6% Profitability and financial positions WHB delivered higher return to shareholders with ROE of 10.6% in FY13 (FY12: 9.8%). Driven by higher earnings and a low dividend payout ratio, as well as the oneoff disposal gain of HK$250m of its office building in Wanchai, WHB s core CET1 CAR improved notably to 12.0% at end-2013 from 10.8% half year ago. Outlook & Prospects M&A is still uncertain at the moment WHB announced that it had entered into exclusive talks with OCBC to finalise the terms of a possible offer by OCBC to acquire a 45% stake in WHB. WHB subsequently extended the exclusive talks to 31 st March (originally set on 31 st January). As of now, there is no binding agreement between the parties, no pricing has been fixed and WHB had not sought regulatory approval for the possible transaction. Management also refused to comment on the status of the M&A deal during analyst meeting. In our view, the extension of the agreement may imply that Fung s family is serious in getting the transaction done with OCBC. This may also imply that no other parties are willing to pay more than what OCBC offered. 2
Outlook guidance by Management Management expects moderate growth in Hong Kong in 2013 supported by low unemployment and recovering external demand in the US and Europe. Risks include tighter credit conditions in China which may drive up deposit competition and capital flight from QE tapering. Onshore and offshore RMB remains a key growth opportunity. Valuation and recommendation Trading at 1.6x FY13 P/B, WHB s stock price performance will largely hinge on M&A talks with OCBC. An estimated deal price of 1.9x FY13 P/BV translates to HK$134/share and offers 22% upside. Nevertheless, once the transaction is terminated, WHB s shares may fall back to pre-m&a level, e.g. 1x P/B, representing 40% downside. The potential upside may not justify the risk and reward. Separately, though Dah Sing Bank is not currently in M&A talks, it would be the last family owned bank in Hong Kong for sale after WHB. Trading at 0.97x P/B, we believe Dah Sing Bank would be a better option to leverage on the M&A theme in HK banking sector. Recommendation: Prefer Dah Sing Banking Group (02356.HK) 3
Appendix I I. Impairment allowances, overdue and rescheduled advances of Wing Hang Bank As % of total customer advances Individual allowance Portfolio allowance Non-performing loans Overdue and rescheduled advances As of 31/12/2013 0.04% 0.17% 0.44% 0.42% As of 30/6/2013 0.05% 0.18% 0.36% 0.53% As of 31/12/2012 0.07% 0.22% 0.45% 0.53% II. Comparison of Wing Hang Bank s loan book: 31/12/2013 vs 31/12/2012 Loans-by industry 31 st Dec, 2013 Up/(down) 31 st Dec, 2012 Property related 22,641 +5.1% 21,536 Financial concerns 2,646 +52.4% 1,736 Wholesale & retail trade 4,482 +108.5% 2,150 Manufacturing 2,567 +31.3% 1,955 Transport & transport equipment 8,596 +14.6% 7,499 Residential mortgages, HOS/PSPS 25,741 +14.2% 22,538 Credit card 257-10.9% 288 Others 12,611 +18.8% 10,612 Trade finance 9,447 +14.1% 8,282 Stockbrokers 972 +169.6% 361 Loans outside HK 45,364 +22.3% 37,097 135,323 +18.6% 114,054 III. Comparison of Wing Hang Bank s loan book: 31/12/2013 vs 30/06/2013 Loans-by industry 31 st Dec, 2013 Up/(down) 30 th Jun, 2013 Property related 22,641 +1.5% 22,302 Financial concerns 2,646 +31.7% 2,009 Wholesale & retail trade 4,482 +80.2% 2,488 Manufacturing 2,567 +4.9% 2,446 Transport & transport equipment 8,596 +9.9% 7,820 Residential mortgages, HOS/PSPS 25,741 +7.2% 24,021 Credit card 257 +2.5% 251 Others 12,611 +8.6% 11,608 Trade finance 9,447 +0.3% 9,417 Stockbrokers 972-5.4% 1,028 Loans outside HK 45,364 +15.5% 39,260 135,323 +10.3% 122,649 4
Appendix II Breakdown of loan book of Wing Hang Bank Breakdown of Loan Book as of 31/12/2013 Total customer advances: HK$135,323 million Loans outside HK 33.5% Property related 16.7% Financial concerns 2.0% Whoelsale & retail trade 3.3% Stockbrokers 0.7% Trade finance 7.0% Others 9.3%Credit card 0.2% Residential mortgages, HOS/PSPS/TPS 19.0% Manufacturing 1.9% Transport and transport equipment 6.4% Breakdown of Loan Book as of 31/12/2012 Total customer advances: HK$114,054 million Loans outside HK 32.5% Property related 18.9% Financial concerns 1.5% Whoelsale & retail trade 1.9% Stockbrokers 0.3% Manufacturing 1.7% Trade finance 7.3% Others 9.3% Credit card 0.3% Residential mortgages, HOS/PSPS/TPS 19.8% Transport and transport equipment 6.6% 5
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