9/F, 10 Des Voeux Road Central, Hong Kong. Dealing: 3608 8000 Research: 3608 8098 Facsimile: 3608 6132 HONG KONG RESEARCH Analyst: Kelvin Li 23 rd February 2006 WING LUNG BANK LIMITED ( 永隆銀行 ) Sector : Banking Chairman and Chief Executive : Dr. Michael Po-ko Wu HKSE Code : 0096 Market Price : HK$64.50 (22/02/2006) Vice Chairman : Dr. Patrick Po-kong Wu Shares Issued : 232.19 million Mkt. Cap. : HK$14,976.26 million Executive Director & 52 weeks Hi/Lo : HK$66.00 / HK$54.05 General Manager : Mr. Che-shum Chung HSI : 15,635.72 (22/02/2006) Main Business : Banking and related financial services SUMMARY OF THE FINAL RESULTS FOR THE YEAR ENDED 31 ST DECEMBER 2005 Final Results Highlights Vs FY2004 (%) Vs 30/06/2005 (%) Net interest income 1,134.6 +5.9% Non-interest income 791.4-9.0% Total operating income 1,926.1-0.8% Operating expenses (576.1) +7.9% Operating profit before impairment allowances 1,350.0-4.1% Charge for impairment allowances on loans & advances (19.8) N/A Attributable profit to equity holders 1,108.8 +7.4% Total loans 36,855.6 +18.3% +5.5% Total deposits 56,223.1-0.3% +2.3% Total assets 74,721.7 +5.2% +4.5% Basic EPS (HK$) HK$4.78 +7.4% Final DPS (HK$) HK$2.13 +7.6% Total DPS (HK$) HK$2.70 +9.8% Selected Ratios FY2005 FY2004 6 months ended 30/06/2005 Net interest margin 1.69% 1.66% 1.63% Impaired loan ratio (NPL ratio *) 0.67% 0.83% 0.66% Impaired allowances coverage (NPL coverage *) 75.6% 177.80% 74.9% Return on average assets 1.52% 1.49% 1.49% Return on average equity 11.25% 11.36% 11.01% Loan-deposit ratio 65.55% 55.24% 63.58% Cost-income ratio 29.91% 27.50% 30.60% Capital adequacy ratio 17.6% 20.5% 18.7% Average liquidity ratio 48.0% 53.4% 47.8% FY2005 results beat expectations Wing Lung Bank reported a 7.4% rise in net profit to HK$1.109 billion for the year ended 31 st December 2005, against consensus forecast of HK$1.03 billion, thanks to a surge in net interest income and a revaluation gain of some HK$188.9 million on investment properties. Excluding the non-recurring gain on property revaluation, the Bank s bottom line would have dropped by 9% y-o-y. Dividend payout at 56% Basic EPS for FY2005 was HK$4.78 (FY2004: HK$4.44), while the Bank proposed a final dividend of HK$2.13 per share, bringing the full-year payout ratio to 56.49% (FY2004: 55.41%). 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, while its group companies may from time to time have interests in securities of the company or companies mentioned herein.
Net interest margin inched up WLB s net interest income amounted to HK$1.135 billion in FY2005, up 5.9% y-o-y, mainly driven by a 3-bps surge in net interest margin at 1.69% and a 18.3% y-o-y loan growth. In fact, the Bank experienced an 8-bps margin squeeze in 1H2005 due to narrowing of the gap between prime rates and the inter-bank rates. All in all, interest margin was much eased in the second half. Loan book boosted by property-related lending As of 31/12/2005, the Bank s loan portfolio totalled HK$36.856 billion, up 18.3% y-o-y. The growth was mainly driven by a sharp jump in property-related loans, as the Bank had joined loan syndication for property developers during the year. By the end of last year, the Bank s property-related loans amounted to HK$12.099 billon, up 55.4% y-o-y, representing 32.8% of the Bank s total. Residential mortgages (including loans for home purchase in the Home Ownership Scheme, Private Sector Scheme & Tenants Purchase Scheme) also showed a solid 7.3% y-o-y growth to HK$12.912 billion last year, representing the lion share of 35.0% of the Bank s loan book. Along with a 2.3% y-o-y growth in total deposits, WLB s loan-to-deposit ratio rose to 65.55% as of 31/12/2005 from 55.24% a year earlier. Non-interest business turned sluggish Non-interest income saw a 9.0% y-o-y drop in FY2005 to HK$791.4 million, due to losses in securities trading as well as lower rental income from its Bank Centre in Mongkok amid renovation. Overall, non-interest income accounted for 41.1% of total operating income in FY2005, down from 44.8% in a year earlier. Business expansion drove cost-to-income ratio higher Operating expenses increased by 7.9% y- o-y, due to higher staff costs and advertising expenses. Coupled with a 0.8% fall in operating income, the Bank s cost-to-income ratio went up to 29.9% in FY2005 from 27.5% a year earlier. Asset quality stayed healthy Wing Lung Bank reported an impairment charge of HK$19.8 million last year, compared with a HK$113.9 million write-back a year earlier. The Bank s impaired loan ratio was 0.67% as of 31/12/2005, improving from 0.83% in FY2004. Sound financial position and better profitability The Bank s CAR was 17.6% as of 31/12/2005 (31/12/2004: 20.5%) and average liquidity ratio at 48.0% (31/12/2004: 53.4%). The Bank s profitability recorded little changed with ROAA and ROAE at 1.52% and 11.25% respectively in FY2005, compared with 1.49% and 11.36% in FY2004. Outlook & Prospects Consumer lending to drive loan growth in FY2006 The Bank s management said consumer lending should be the growth driver for this year, as local sentiments continue to improve amid better employment conditions and sustained economic growth. NIM outlook stays healthy The Bank s net interest margin widened in 2H2005, after the introduction of two-way trading bands for HK dollar against US dollar by the Hong Kong Monetary Authority to fine tune the linked exchange rate system. The Bank s management said interest margin outlook is expected to stay positive in FY2006, while the recent mortgage war among local banks should stabilize soon and pose little threat for the Bank s NIM. Non-interest business seen picking up steam The Bank is confident its non-interest business should revive growth in FY2006, as peaking rates should boost sale of interest rate-related wealth management products while stock brokerage should grow favourably amid an active HK stock market. Fair valuations Trading at 13.5x FY2006E P/E and 1.4x FY2006E P/B, valuations of WLB are in line with sector average. Given the Bank s 4% dividend yield and a potential acquisition target, we rate the counter a Hold. Recommendation: Hold 2
Appendix 1 I. Allowances, impaired loans, overdue and rescheduled advances of Wing Lung Bank As % of total customer advances Individual impairment allowances Collective impairment allowances Impaired loans Overdue and rescheduled advances As of 31/12/05 0.19% 0.31% 0.67% 0.88% As of 30/06/05 0.20% 0.29% 0.66% 0.98% Specific provisions General provisions NPLs Overdue and rescheduled advances As of 31/12/04 0.30% 1.18% 0.83% 1.42% II. Comparison of the Wing Lung Bank s loan book : 31/12/2005 Vs 30/06/2005 Loans-by industry 31 st Dec, 2005 Up/(down) 30 th Jun, 2005 Property related 12,099 +30.5% 9,272 Financial concerns 435 +31.3% 332 Wholesale & retail trade 414 +4.8% 395 Manufacturing 469-0.2% 470 Transport & transport equipment 1,304 +29.4% 1,008 Residential mortgages, HOS/PSPS 12,912 +0.8% 12,814 Credit card 574 +86.1% 308 Others 4,851-17.8% 5,905 Trade finance 571 +5.7% 540 Stockbrokers 2 +188.3% 1 Loans outside HK 3,224-17.3% 3,898 36,856 +5.5% 34,942 ======== ======== III. Comparison of Wing Lung Bank s loan book : 31/12/2005 Vs 31/12/2004 Loans-by industry 31 st Dec, 2005 Up/(down) 31 st Dec, 2004 Property related 12,099 +55.4% 7,784 Financial concerns 435 +57.6% 276 Wholesale & retail trade 414-2.9% 426 Manufacturing 469-1.7% 477 Transport & transport equipment 1,304 +19.3% 1,093 Residential mortgages, HOS/PSPS 12,912 +7.3% 12,037 Credit card 574 +78.9% 321 Others 4,851 +0.4% 4,831 Trade finance 571 +30.1% 439 Stockbrokers 2-41.0% 4 Loans outside HK 3,224-6.7% 3,455 36,856 +18.3% 31,144 ======== ======== 3
Appendix II Breakdown of loan book of Wing Lung Bank Breakdown of loan book as of 31/12/2005 Total customer advances: HK$36,856 million Trade finance 1.5% Others 13.2% Credit card 1.6% Stockbrokers 0.0% Loans outside HK 8.7% Property related 32.8% Financial concerns 1.2% Residential mortgages, HOS/PSPS 35.0% Transport & transport equipment 3.5% Wholesale & retail trade 1.1% Manufacturing 1.3% Breakdown of loan book as of 31/12/2004 Total customer advances : HK$31,144 million Stockbrokers 0.0% Trade finance 1.4% Loans outside HK 11.1% Property related 25.0% Others 15.5% Financial concerns 0.9% Credit card 1.0% Residential mortgages, HOS/PSPS 38.6% Wholesale & retail trade 1.4% Manufacturing 1.5% Transport & transport equipment 3.5% 4
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