9/F, 10 Des Voeux Road Central, Hong Kong. Dealing: 2308 8200 Research: 3608 8097 Facsimile: 3608 6132 HONG KONG RESEARCH Analyst: Paul Sham 25 th August 2011. BOC HONG KONG (HOLDINGS) LIMITED ( 中銀香港 ) Sector : Banking Chairman : Mr. Xiao Gang HKSE Code : 02388 Market Price : HK$20.65 (25/08/2011) Vice Chairman & Chief Executive : Mr. He Guangbei Shares Issued : 10,572.78m Mkt. Cap. : HK$218,328m 52 weeks Hi/ Lo : HK$28.83 / HK$18.20 HSI : 19,752.48 (25/08/2011) Main Business : Banking and related financial services SUMMARY OF THE INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 TH JUNE 2011 Interim Results Highlights Vs 1H2010 (%) Vs 31/12/2010 (%) Net interest income 10,205 +13.8% Non-interest income 9,141 +22.7% Total operating income 19,346 +17.8% Operating expenses (1,993) -56.0% Operating profit before impairment losses 17,353 +46.0% Net charge of impairment allowances (37) -139.4% Profit before taxation 14,587 +66.4% Taxation (2,233) +57.9% Attributable profit to shareholders 11,993 +66.8% Total loans 672,858 +17.7% +9.7% Total deposits 1,104,004 +23.6% +7.4% Total assets 1,830,379 +40.6% +10.2% Basic EPS (HK$) 1.1343 +66.8% Interim DPS (HK$) 0.6300 +57.5% Selected Ratios 1H2011 1H2010 FY2010 Net interest margin 1.21% 1.58% 1.49% Cost-income ratio 10.3% 27.6% 34.8% Return on average assets 1.33% 1.17% 1.21% Return on average equity 19.9% 13.7% 14.8% Impaired loan ratio 0.10% 0.23% 0.14% Impaired advances coverage 349.9% 173.8% 266.6% Loan-deposit ratio 60.9% 64.0% 59.7% Core Capital adequacy ratio 12.9% 11.3% 11.3% Capital adequacy ratio 17.6% 16.2% 16.1% Average liquidity ratio 36.4% 37.8% 38.8% 1H11 results slightly below market expectations Bank of China (Hong Kong) ( BOCHK ) reported net profit of HK$11,993m, up 66.8% y-o-y. The stellar results were helped by a Lehman minibond write-back of HKD2,854m and a property revaluation gain of HKD1,486m. Excluding Lehman write-back, BOCHK reported an underlying net profit of HK$9,139m, up 27.1% y-o-y, slightly below market consensus of HK$9,549m. Key positives were strong CAR, better cost control and higher-than-peers dividend payout. BOCHK declared the interim dividend of HK$0.63 per share, representing a payout ratio of 56%. 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.
Narrowed NIM but strong loan growth Net interest income increased 13.8% y-o-y to HK$10,205m. Net interest margin (NIM) in 1H11 narrowed 37bps y-o-y to 1.21% due to the increase in market rate-based loans amid the low interest rate environment, rising funding costs and a continued dilution effect from low-margin RMB business. Should the impact of BOCHK s RMB clearing function be excluded, the adjusted NIM would have been 1.48%, down 16bps. The negative impact of lower NIM was mostly compensated by the 17.7% y-o-y growth in total loans, with notable growth being seen in overseas loans (+55.1% y-o-y) and trade finance (+52.3%). Total deposit also grew 23.6% y-o-y with the strong performance of RMB and USD deposits. Non-interest income up 22.7% The bank reported a 17.3% y-o-y and 9.3% h-o-h growth in net fees income. BOCHK s primary fee income contributor, securities brokerage fee, was lukewarm (down 1.6% y-o-y and 18.8% h-o-h) as investment sentiments turned weaker in the first half of 2011. Nevertheless, the increase of 177.3% in commission income from the insurance business, 162.7% from fund distribution and 31.7% from credit card fees helped offset the disappointment in brokerage income. BOCHK also reported a net trading gain of HK$761m, versus a net trading loss of HK$36m a year earlier. The rebound was led by the trading income from foreign exchange as well as drastic decrease in the loss arising from interest rate instruments. Cost control was a bright spot Operating expenses dropped by 56.0% y-o-y to HK$1,993m as HK$2,854m was recovered from the collateral of the Lehman Brothers Minibond. Excluding the collateral recovery, BOCHK s core operating expenses increase 8.3% y-o-y. Staff cost, which accounted for 56.8% of total expenses, increased by 8.5% y-o-y, due to the increase in the headcount (+675 headcounts in 1H11 to 14,104). Cost-to-income ratio of BOCHK improved to 31.9% in 1H11, compared with 35.5% in 1H10. Credit charges remained low Loan impairment allowances recorded a net charge of HK$37m in 1H11, compared with a net reversal of HK$94m in 1H10. BOCHK s loan quality continued to improve. The bank reported improvement in asset quality with decline in both impaired loan amount (down 18.6% h-o-h) and ratio (0.10% at end-june 2011 versus 0.14% at end- 2010). Capital position at comfortable levels BOCHK adopted the Foundation Internal-Ratings-Based (FIRB) approach to calculate credit risk weighted assets (RWA) for the first time. As a result, credit RWA declined by 13% h-o-h and core CAR and total CAR rose to 12.9% and 17.6% h-o-h respectively. Outlook & Prospects Loan growth set to slow down Even though BOCHK benefits from parental loan referrals for cross-border trade business, loan growth is set to slow in 2H11 as low transaction volume amid cooling residential property market will lead to a slowdown in mortgage growth. On the other hand, BOCHK s Mainland subsidiary will need to slow down its lending in order to meet the CBRC s 75% loan-to-deposit ratio (LDR) requirement by year end. According to Management, the China business LDR was 86% in 1H11 (2H10: 113%). Stand out by dividend payout BOCHK stands out above its peers by far as its 1H11 results suggest its highest capital sufficiency, leading to dividend certainty and growth potential. BOCHK is committed to dividend payout of 60%-70% and stocks like BOCHK with strong and stable dividend yield should outperform in the times of uncertainty. On the other hand, with 1H11 Tier 1 and CAR ratios of 12.9% and 17.6% respectively, the risk of capital call being the lowest for BOC(HK) among peers. Limited exposure to high-risk debts Within BOCHK s investments, half of its HK$440bn debt securities held are issued by corporates/governments in Asia (mainly HK and China). The rest is equally split between the US and Europe. 58% of its US holdings are sovereign debts, while more than 90% of its European portfolio consists of debt securities issued by corporates/governments of the UK, Germany, France and Holland. Its exposure to Ireland and Italy of HK$1bn was down from FY10 s HK$1.24bn. Hence, its exposure to high-risk European debts is likely to be limited. 2
Continued RMB market development offers additional upside Given its strong backing from its parent BOC and its unique status as the designated clearing bank in HK, BoCHK remains one of the best placed HK Banks to capitalize on the liberalization of offshore RMB activities in HK. In addition, the continuous RMB developments announced by Chinese Vice Premier Li Keqiang in mid-august further confirmed BOCHK s competitive advantage over peers. Potential RMB earning prospect will remain a key share price driver for BOCHK in the medium term. Valuations BOCHK is trading at 1.75x FY11E P/B and 11.6x FY11E P/E. Given the bank s strong positioning in terms of offshore RMB market share, solid fundamentals, stable dividend payout policy and its mid-teen ROE (excluding impact of Lehman s recovery), we believe its valuation is attractive. As such, we recommend an outperform rating for the counter. Recommendation: Outperform 3
Appendix I I. Impairment allowances, overdue and rescheduled advances of BOC Hong Kong As % of total customer advances Individual allowance Portfolio Non-performing allowance loans Overdue and rescheduled advances As of 30/06/2011 0.04% 0.33% 0.10% 0.08% As of 31/12/2010 0.05% 0.32% 0.14% 0.11% As of 30/06/2010 0.09% 0.31% 0.23% 0.19% II. Comparison of BOC Hong Kong s loan book: 30/06/2011 vs 31/12/2010 Loans-by industry 30 th June, 2011 Up/(down) 31 st Dec, 2010 Property related 101,289 +4.6% 96,807 Financial concerns 9,720 +7.9% 9,011 Wholesale & retail trade 32,296 +32.9% 24,300 Manufacturing 16,559 +9.5% 15,125 Transport & transport equipment 26,535 +13.4% 23,409 Residential mortgages, HOS/PSPS 179,727 +12.5% 159,715 Credit card 8,595 +4.4% 8,230 Others 58,290 +16.7% 49,934 Trade finance 59,840 +12.1% 53,396 Stockbrokers 1,625 +192.3% 556 Loans outside HK 178,382 +3.3% 172,736 672,858 +9.7% 613,219 III. Comparison of BOC Hong Kong s loan book: 30/06/2011 vs 30/06/2010 Loans-by industry 30 th June, 2011 Up/(down) 30 th June, 2010 Property related 101,289 +0.2% 101,113 Financial concerns 9,720-50.8% 19,754 Wholesale & retail trade 32,296 +18.3% 27,309 Manufacturing 16,559-40.5% 27,833 Transport & transport equipment 26,535 +0.1% 26,519 Residential mortgages, HOS/PSPS 179,727 +25.6% 143,063 Credit card 8,595 +20.3% 7,143 Others 58,290-7.7% 63,156 Trade finance 59,840 +52.3% 39,285 Stockbrokers 1,625 +25.9% 1,291 Loans outside HK 178,382 +55.1% 115,020 672,858 +17.7% 571,486 4
Appendix II EAST ASIA SECURITIES COMPANY LIMITED Breakdown of loan book of BOC Hong Kong Breakdown of Loan Book as of 30/06/2011 Total customer advances: HK$672,858 million Loans outside HK 26.5% Property related 15.1% Financial concerns 1.4% Whoelsale & retail trade 4.8% Manufacturing 2.5% Trade finance 8.9% Others 8.7% Credit card 1.3% Residential mortgages, HOS/PSPS/TPS 26.7% Transport and transport equipment 3.9% Breakdown of Loan Book as of 31/12/2010 Total customer advances: HK$613,219million Loans outside HK 28.2% Property related 15.8% Financial concerns 1.5% Whoelsale & retail trade 4.0% Trade finance 8.7% Others 8.1% Credit card 1.3% Residential Transport and mortgages, transport equipment HOS/PSPS/TPS 3.8% 26.0% Manufacturing 2.5% 5
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