9/F, 10 Des Voeux Road Central, Hong Kong. Dealing: 3608 8000 Research: 3608 8097 Facsimile: 3608 6132 HONG KONG RESEARCH Analyst: Vincent Leung 7 th March 2007. FUBON BANK (HONG KONG) LIMITED ( 富邦銀行 ( 香港 )) Sector : Banking Chairman : Mr. Tsai Ming-Hsing, Richard HKSE Code : 0636 Market Price : HK$4.18 (06/03/2007) Managing Director & CEO : Mr. Lee Jin-Yi Shares Issued : 1,172.16 million Mkt. Cap. : HK$4,899.63 million 52 weeks Hi/ Lo : HK$4.730 / HK$2.775 HSI : 19,058.56 (06/03/2007) Main Business : Banking and related financial services SUMMARY OF THE FINAL RESULTS FOR THE YEAR ENDED 31 ST DECEMBER 2006 Final Results Highlights Vs FY2005 (%) Vs 30/06/2006 (%) Net interest income 696.8 +38.3% Non-interest income 430.6 +31.8% Total operating income 1,127.4 +35.7% Operating expenses (716.7) +18.9% Other operating income 430.5 +31.76% Operating profit before impairment losses 410.6 +80.3% Impairment losses on loans and advances (65.5) N/A Gains / losses from disposals of available-forsale securities 46.9 N/A Profit before taxation 391.5 +43.0% Taxation (64.3) +98.7% Attributable profit to shareholders 327.2 +35.5% Total loans 25,914.4 +20.3% +8.0% Total deposits (including debt securities issued) 38,748.3 +6.6% +14.7% Total assets 53,346.9 +7.1% +3.9% Basic EPS (HK$) 0.2791 +35.5% Final DPS (HK$) 0.12 +9.1% Total DPS (HK$) 0.18 +5.9% Selected Ratios FY2006 FY2005 1H2006 Net interest margin 1.35% 1.09% 1.29% Cost-income ratio 63.6% 72.6% 59.8% Return on average assets 0.63% 0.51% 0.49% Return on average equity 8.49% 6.48% 6.83% Impaired loan ratio 0.93% 0.99% 1.08% Impaired advances coverage 68.0% 79.2% 85.8% Loan-deposit ratio 66.9% 59.3% 71.1% Capital adequacy ratio 16.8% 15.0% 19.9% Average liquidity ratio 44.5% 44.7% 42.9% FY2006 net profit beat market expectations Fubon Bank (Hong Kong) ( Fubon HK ) reported a 35.5% jump in net profit to HK$327.2 million for FY2006, which beat market expectations (HK$214 million-hk$294 million). Stripping out the lower gains on disposals of fixed assets of HK$22,000 (FY2005: HK$39 million), pre-tax profit would have jumped 66.7%, thanks to strong top-line growth (+35.7%) as well as a gain of HK$46.9 million from disposals of available-for-sale securities (FY2005: a loss of HK$17.8 million), while a loan impairment charge of HK$65.5 million (FY2005: a write-back of HK$20.2 million) was also behind the scene. 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.
Surge in net interest income Net interest income increased 38.3% in FY2006 on improvement in money market performance, widening Prime-HIBOR spread, a 20.3% loan growth and higher investment yield through better investment mix as well as tight control of new fixed-deposit rates. NIM improved by 26 bps to 1.35%. Taiwan lending drove overall loan growth The bank s loan book grew 20.3% during the year, mainly driven by short-term advances and project & syndicated/term loans (booked under Others category) as well as hire purchase loans. Loans for use outside Hong Kong shot up 75.1%, driven by Taiwan-related loans. During FY2006, the Taiwan team recorded a 152% growth in corporate loans to HK$1.6 billon. With a milder 6.6% rise in total deposits (including debt securities issued), Fubon s loan-to-deposit ratio rose from 59.3% as of 31/12/2005 to 66.9% as of 31/12/2006, a step closer to the bank s target of 70%. Non-interest income grew on strong sales of investment products Non-interest income soared 31.8% in FY2006, with a bulk of the growth coming from fee income, according to the management. The bank s management attributed the strong performance in this area to financial markets related fees (+26%) on the better sales of its investment products (+101%) and rise in brokerage-related commission income (+37%). Consumer banking related fee also jumped 44%, on higher unit trust commission income (+86%), insurance commission (+55%) and net fee income from credit cards (+21%) on growing card base. Cost efficiency improved, but still much worse than peers Fubon HK s operating expense rose 18.9% in FY2006, with a majority of the increase in staff costs on the back of a headcount growth (31/12/2006: 911, +13.4%). Management expected the bank s headcount to increase to around 1,000 by the end of 2007. With operating income growth (+35.7%) outpaced the rise in operating expenses, the bank s cost-toincome ratio improved to 63.6%, compared with 72.6% a year earlier. Slight improvement in loan book quality The bank s impaired loan ratio fell to 0.93% as of 31/12/2006 from 0.99% as of 31/12/2005. Fubon HK booked a HK$65.5-million impairment charge in FY2006, versus a HK$20.2-million write-back a year earlier. Improving profitability but remained weak Fubon HK s profitability stayed weak although gradually improving, with ROAA and ROAE at 0.63% and 8.49% respectively for FY2006 (FY2005: 0.51% and 6.48%). Outlook & Prospects Growing Taiwan business remains insignificant Distinctive from other Hong Kong banks, support from parent should provide Fubon HK ample Taiwan-related business opportunities, which should be the main driver for the bank. Albeit strong growth in Taiwan corporate lending, Taiwan-related lending only accounts for 6% of the Bank s total loan portfolio. Further business integration with parent has been ongoing to reap synergies in both revenues and costs. High cost to income ratio on continuing business restructuring Cost-to-income ratio of the Bank has been the highest among the Hong Kong-listed local banks. Expansions in Taiwan-related and wealth management businesses have been the main culprits. Going forward, additional office space in Central Tower for business expansion and major IT investments shall also exert cost pressure on the bank. As the bank remains in the restructuring and expansion phase, its cost-income ratio is expected to stay high. Potential acquisition of a stake in a mainland city commercial bank According to media reports, Xiamen City Commercial Bank was in talks with the Bank s parent, which potentially would have marked the first Taiwanese bank investment in a Mainland Chinese bank. It was said the parent company, which is Taiwan s No.5 financial holding firm by assets, planned to use Fubon HK to buy a stake in the Xiamen lender. Without commenting on the media report, the Bank s management said there is no additional restriction on Fubon HK to make acquisitions on the Mainland as in the case of other Hong Kong banks, and balancing interests of all parties, including regulators, would be the key obstacle. Unattractive valuations Trading at 1.25x FY2007E P/B and 14.8x FY2007E P/E, valuations of the counter do not look attractive at all with an ROE of just ~8% despite gradually improving fundamentals. Moreover, the 15% run-up over the past three months should have reflected the potential Mainland acquisition. As such, we maintain our Sell call. Recommendation: Sell 2
Appendix I I. Impairment allowances, overdue and rescheduled advances of Fubon (Hong Kong) As % of total customer advances Individual allowance Collective allowance Impaired advances Overdue and rescheduled advances As of 31/12/2006 0.32% 0.31% 0.93% 0.80% As of 30/06/2006 0.51% 0.41% 1.08% 0.80% As of 31/12/2005 0.43% 0.35% 0.99% 1.26% II. Comparison of Fubon (Hong Kong) s loan book: 31/12/2006 vs 31/12/2005 Loans-by industry 31 st Dec, 2006 Up/(down) 31 st Dec, 2005 Property related 4,929.7 +24.7% 3,951.9 Financial concerns 484.3 +54.6% 313.2 Wholesale & retail trade 202.4 +103.9% 99.2 Manufacturing 1,059.5-38.1% 1,710.8 Transport & transport equipment 756.2 +10.7% 683.3 Residential mortgages, HOS/PSPS 6,950.2-7.4% 7,504.6 Credit card 504.2 +5.4% 478.6 Others 4,547.1 +53.1% 2,969.5 Trade finance 943.4 +56.7% 601.9 Stockbrokers 157.4-1.4% 159.6 Loans outside HK 5,380.0 +75.1% 3,071.8 25,914.4 +20.3% 21,544.4 III. Comparison of Fubon (Hong Kong) s loan book: 31/12/2006 vs 30/06/2006 Loans-by industry 31 st Dec, 2006 Up/(down) 30 th June, 2006 Property related 4,929.7 +26.5% 3,897.5 Financial concerns 484.3 +13.3% 427.4 Wholesale & retail trade 202.4 +35.1% 149.8 Manufacturing 1,059.5-71.4% 3,710.9 Transport & transport equipment 756.2-4.9% 795.0 Residential mortgages, HOS/PSPS 6,950.2-3.8% 7,224.9 Credit card 504.2 +6.2% 474.9 Others 4,547.1 +27.8% 3,556.7 Trade finance 943.4 +14.9% 821.3 Stockbrokers 157.4 +19.5% 131.7 Loans outside HK 5,380.0 +91.6% 2,808.4 25,914.4 +8.0% 23,998.5 Remark: There was a reclassification of the categories as shown in Fubon (Hong Kong) s FY2006 financial results announcement, which made loan book comparison by category for 31/12/2006 vs. 30/06/2006 not meaningful. 3
Appendix II Breakdown of loan book of Fubon (Hong Kong) Breakdown of Loan Book as of 31/12/2006 Total customer advances: HK$25,914 million Stockbrokers 0.6% Trade finance 3.6% Loans outside HK 20.8% Property related 19.0% Financial concerns 1.9% Whoelsale & retail trade 0.8% Manufacturing 4.1% Others 17.5% Credit card 1.9% Residential mortgages, HOS/PSPS/TPS 26.8% Transport and transport equipment 2.9% Breakdown of Loan Book as of 31/12/2005 Total customer advances: HK$21,544 million Stockbrokers 0.7% Trade finance 2.8% Others 13.8% Loans outside HK 14.3% Property related 18.3% Financial concerns 1.5% Whoelsale & retail trade 0.5% Manufacturing 7.9% Credit card 2.2% Residential mortgages, HOS/PSPS/TPS 34.8% Transport and transport equipment 3.2% 4
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