9/F, 10 Des Voeux Road Central, Hong Kong. Dealing: 3608 8000 Research: 3608 8097 Facsimile: 3608 6132 HONG KONG RESEARCH Analyst: Vincent Leung 17 th August 2007. WING HANG BANK LIMITED ( 永亨銀行 ) Sector : Banking Chairman & Chief Executive : Dr. Patrick Y. B. Fung HKSE Code : 0302 Market Price : HK$84.00 (16/08/2007) Deputy Chief Executive Mr. Frank J Wang Shares Issued : 294.929 million Mkt. Cap. : HK$24,774.06 million 52 weeks Hi/ Lo : HK$106.20 / HK$71.50 HSI : 20,672.39 (16/08/2007) Main Business : Banking and related financial services SUMMARY OF THE INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 TH JUNE 2007 Interim Results Highlights Vs 1H2006 (%) Vs 31/12/2006 (%) Net interest income 1,164.2 +14.1% Non-interest income 486.2 +7.1% Total operating income 1,650.4 +12.0% Operating expenses (610.7) +17.8% Operating profit before impairment losses 1,039.7 +8.8% Impairment losses on loans and advances 2.5 N/A Revaluation gain of investment properties and disposal of tangible fixed assets 1.3-91.4% Gains / (losses) from disposals of available-forsale financial assets 39.9 N/A Profit before taxation 1,113.0 +13.8% Taxation (155.9) -2.6% Profit attributable to shareholders 956.3 +17.0% Total loans 70,942.3 +26.5% +21.0% Total deposits 110,335.8 +14.7% +4.3% Total assets 134,316.4 +20.5% +10.0% Basic EPS (HK$) 3.25 +16.9% Interim DPS (HK$) 0.96 +17.1% Selected Ratios 1H2007 1H2006 FY2006 Net interest margin 1.92% 1.95% 1.90% Cost-income ratio 37.0% 35.2% 36.6% Return on average assets 1.52% 1.51% 1.47% Return on average equity 19.9% 19.1% 18.9% Impaired loan ratio 0.41% 0.86% 0.62% Impaired advances coverage 89.7% 58.1% 71.7% Loan-deposit ratio 64.3% 58.3% 55.4% Capital adequacy ratio 17.2% 15.0% 15.2% Average liquidity ratio 52.3% 50.8% 51.6% 1H2007 net profit topped market expectations Wing Hang Bank ( WHB ) reported a 17.0% y-oy increase in net profit to HK$956.3 million for 1H2007, which topped market expectations (HK$878 million-hk$950 million). The increase was mainly attributable to higher net interest income (+14.1%), a gain of HK$39.9 million from disposals of available-for-sale securities (1H2006: Nil) and the strong performance of the bank s associated companies (HK$29.6 million, up 3.6x), including Hong Kong Life and Bank Consortium Trust. 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.
Growth in net interest income but a slight shrinkage in NIM Net interest income rose 14.1% y- o-y in 1H2007, mainly driven by loan volume growth. Net interest margin narrowed slightly by 3 bps y-o-y to 1.92% in 1H2007 as the positive impact from loan growth (+7 bps) was more than offset by negative effects and persistent pricing pressure on mortgage book (-9 bps) and narrowing Prime-HIBOR spread (-1 bp). Macau and China fuelled underlying loan growth WHB s overall loan portfolio grew by 21.0% h-o-h during 1H2007. Unsurprisingly, the solid underlying growth was primarily driven by the loan growth in the Mainland (+10.1% h-o-h) and Macau (+10.9% h-o-h). Growth in its Hong Kong loan book (+26.0% h-o-h) was essentially boosted by Inchroy Credit (acquired in January 2007) that contributed half of the growth according to the management, while solid IPO financing (contributed 3 ppts of the overall growth) was also a major driver. Excluding IPO financing and contribution from Inchroy Credit, WHB s Hong Kong loan book would grew 6.0% h-o-h only. Meanwhile, total deposits increased by 4.3% h-o-h. As a result, the loan-to-deposit ratio jumped to 64.3% as of 30/06/2007 from 55.4% as of 31/12/2006. Mild increase in non-interest income Net fee income jumped 32.8% y-o-y, propelled by strong brokerage commission (HK$95.9 million, +91.4%) amid a robust Hong Kong stock market, loan commission (HK$74.0m, +43.8%) driven by loan volume growth, penalty charges and contribution from Inchroy, as well as wealth management fees (HK$55.3 million, +37.2%). However, WHB recorded a mark-to-market loss of HK$22.9m from interest-rate swap in 1H2007 against a gain of HK$74.9m in 1H2006. As a result, non-interest income just increased by a mild 7.1% y-o-y in 1H2007. Cost growth driven by staff costs and expansion Operating expenses increased 17.8% y-o-y, attributable to higher staff-related costs (+16.8% y-o-y) on an increase in headcount (2,631, +12.5% y-o-y) and a rise in salaries and compensations as well as further investments in the Mainland and Macau. With cost growth outpaced a 12.0% y-o-y increase in total operating income, the bank s cost-to-income ratio rose to 37.0% in 1H2007 from 35.2% a year earlier. Management of the bank expects the full-year ratio to be steady at the ~37% level. Solid results from Banco Weng Hang Banco Weng Hang contributed HK$161m in net profit in 1H2007, up 43.1% y-o-y and accounting for 17% of WHB s total (1H2006: 14%). The strong performance was attributable to a 19.1% y-o-y jump in net interest income driven by a 10.2% h-oh loan growth despite a narrowed NIM at 1.94% (1H2006: 2.20%) as well as a 64.7% jump in noninterest income driven by fee income from wealth management services. Improvement in loan quality WHB reported a net release on loan impairment losses of HK$2.5m 1H2007 (1H2006: a charge of HK$0.8m), thanks to the continued benign credit environment. In addition, the bank s impaired loan ratio improved to 0.41% as of 30/06/2007 0.62% as of 31/12/2006. Strong profitability The bank continued to deliver solid return to shareholders, with ROAE of 19.9% 1H2007. Meanwhile, CAR stood at 17.2% as of 30/06/2007, following the issuance of US$400m step-up perpetual subordinated notes in April 2007. 2
Outlook & Prospects 1H2007 results paint similar picture as peers As in the same situation with other local Hong Kong banks, WHB s will continue to see pressure on its net interest margin amid narrowing Prime- HIBOR spread and lack of loan demand locally. Mainland and Macau operations remain the key loan growth driver for the bank. Wealth management business should be another driver for fee income whilst intensifying competitions may slow down the growth going forward. Macau is the key driver Banco Weng Hang is the crown jewel for WHB given its high NIM (1H2007: 1.94%) and good cost efficiency (1H2007 cost-to-income ratio: 30.6%). Macau should remain the growth driver in terms of loans and earnings amid the robust economic growth. PRC business in investment phase Following the regulatory approval for local incorporation to pursue RMB retail-banking business in June 2007, the bank will have to deploy resources to build up a deposit-taking franchise. Nevertheless, instead of pursuing an aggressive branch build-out strategy, the bank will focus on a niche market in a few cities (i.e. Shenzhen, Shanghai, Guangzhou and Beijing) to reap maximum opportunities on the Mainland. Management of the bank said it expects to open 2 sub-branches (1 each in Shenzhen and Guangzhou) in 2H2007 and plans to open 10 branches/sub-branches over the next 3 years. Fairly valued Trading at 2.4x FY2007E P/B and 13.9x FY2007E P/E, WHB s current valuations should have captured the solid fundamentals (i.e. strong ROE, solid outlook for its Macau operations). M&A potential may serve as a share-price catalyst for this mid-cap local bank in the medium. As such, we reiterate our Neutral rating for the counter. Recommendation: Neutral 3
Appendix I I. Impairment allowances, overdue and rescheduled advances of Wing Hang Bank As % of total customer advances Individual allowance Collective allowance Impaired advances Overdue and rescheduled advances As of 30/06/2007 0.11% 0.26% 0.41% 0.36% As of 31/12/2006 0.16% 0.29% 0.62% 0.56% As of 30/06/2006 0.17% 0.33% 0.86% 0.63% II. Comparison of Wing Hang Bank s loan book: 30/06/2007 vs 31/12/2006 Loans-by industry 30 th June, 2007 Up/(down) 31 st Dec, 2006 Property related 12,344.2 +9.2% 11,306.6 Financial concerns 1,101.7 +0.0% 1,101.5 Wholesale & retail trade 785.7-2.7% 807.7 Manufacturing 1,900.6 +53.1% 1,241.3 Transport & transport equipment 5,541.8 +129.3% 2,416.6 Residential mortgages, HOS/PSPS 18,247.9 +12.1% 16,284.1 Credit card 309.3-4.3% 323.1 Others 9,115.0 +45.2% 6,279.3 Trade finance 3,327.4 +9.1% 3,049.1 Stockbrokers 1,179.9 +240.6% 346.5 Loans outside HK 17,088.8 +10.4% 15,482.3 70,942.3 +21.0% 58,638.2 III. Comparison of Wing Hang Bank s loan book: 30/06/2007 vs 30/06/2006 Loans-by industry 30 th June, 2007 Up/(down) 30 th June, 2006 Property related 12,344.2 +21.5% 10,159.5 Financial concerns 1,101.7 +0.3% 1,099.0 Wholesale & retail trade 785.7-3.5% 814.6 Manufacturing 1,900.6 +28.6% 1,477.6 Transport & transport equipment 5,541.8 +94.5% 2,849.8 Residential mortgages, HOS/PSPS 18,247.9 +13.4% 16,097.8 Credit card 309.3 +3.4% 299.2 Others 9,115.0 +48.8% 6,126.2 Trade finance 3,327.4 +6.3% 3,128.7 Stockbrokers 1,179.9 +264.5% 323.7 Loans outside HK 17,088.8 +24.8% 13,694.9 70,942.3 +26.5% 56,071.0 Note: Wing Hang bank s loan balance as of 30 th Corporation Limited acquired in January 2007. Jun 2007 includes assets of Inchroy Credit 4
Appendix II Breakdown of loan book of Wing Hang Bank Stockbrokers 1.7% Breakdown of Loan Book as of 30/06/2007 Total customer advances: HK$70,942 million Loans outside HK 24.1% Property related 17.4% Financial concerns 1.6% Whoelsale & retail trade 1.1% Trade finance 4.7% Others 12.8% Credit card 0.4% Residential mortgages, HOS/PSPS/TPS 25.7% Manufacturing 2.7% Transport and transport equipment 7.8% Breakdown of Loan Book as of 31/12/2006 Total customer advances: HK$58,638 million Loans outside HK 26.4% Property related 19.3% Financial concerns 1.9% Whoelsale & retail trade 1.4% Stockbrokers 0.6% Manufacturing 2.1% Trade finance 5.2% Others 10.7% Credit card 0.6% Residential mortgages, HOS/PSPS/TPS 27.8% Transport and transport equipment 4.1% 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. 6