9/F, 10 Des Voeux Road Central, Hong Kong. Dealing: 3608 8000 Research: 3608 8097 Facsimile: 3608 6132 HONG KONG RESEARCH Analyst: Kevin Tam 1 st August 2006 HANG SENG BANK LIMITED ( 恒生銀行 ) Sector : Banking Chairman : Mr. Michael R. P. Smith HKSE Code : 0011 Market Price : HK$99.1 (01/08/2006) Vice-Chairman & Chief Executive : Mr. Raymond C. F. Or Shares Issued : 1,911.842 million Mkt. Cap. : HK$189,464 million Managing Director & 52 weeks Hi/Lo : HK$108.4 / HK$94.0 Deputy Chief Executive : Mr. Joseph C. Y. Poon HSI : 16,911.37 (01/08/2006) Main Business : Banking and related financial services SUMMARY OF THE INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 TH JUNE 2006 Interim Results Highlights Vs 1H2005 (%) Vs FY2005 (%) Net interest income 6,375 +21.1% Non-interest income 6,021 +15.0% Total operating income 12,396 +18.1% Loan impairment (charges)/releases and other credit risk allowances (34) -88.7% Operating expenses (2,338) +8.4% Attributable profit 6,190 +2.4% Total loans 267,393 +2.2% 2.2% Total deposits 448,097 +4.1% 4.0% Total assets 628,289 +9.8% 8.2% EPS (HK$) 3.24 +2.5% 1 st and 2 nd interim DPS (HK$) 2.20 +0.0% Selected Ratios 1H2006 1H2005 FY2005 Net interest margin 2.37% 2.13% 2.19% Impaired loan ratio 0.4% 0.7% 0.5% Impaired loan coverage 73.5% 61.7% 72.2% Return on average assets 2.1% 2.2% 2.0% Return on average equity 29.0% 29.7% 27.5% Loan-deposit ratio 52.8% 56.8% 54.4% Cost-income ratio 26.8% 26.7% 28.0% Total capital ratio 14.2% 12.4% 12.8% Tier 1 capital ratio 11.1% 10.4% 10.4% Average liquidity ratio 50.9% 43.6% 45.1% 1H2006 results slightly better market expectations Hang Seng Bank reported a 2.4% y-o-y increase in net profit to HK$6,190 million for the six months ended 30 June 2006, which was slightly better than market expectations. The result was driven by decent growth in total operating income, up 18% y-o-y. The net operating income (after impairment charges) registered a decent 11.6% y-o-y gain. The lower bottom-line growth was mainly attributed to higher effective tax rate of 16% (vs. 13.1% in 1H05) and property revaluation gain decreasing 63.7% y-o-y to HK$318 million. 1H06 EPS was HK$3.24, up 2.53% y-o-y. Dividend per share for 1H06 was unchanged at HK$2.2. Dividend payout ratio was 67.9%, compared with 69.6% in 1H06. 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 widened 24 bps Net interest income rose 21.1% y-o-y to HK$6,375 million, with a 8.7% y-o-y increase in average interest-bearing assets. Net interest margin widened 24 bps from a year-ago period to 2.37%, reflecting a 41 basis point rise in contribution from net free funds and a 17 basis point fall in net interest spread. The non-treasury portfolios performed well due to improvement in spreads on Best Lending Rate - based loans, which benefited from a wider BLR/HIBOR gap and the widening of deposit spreads. However, the treasury balance sheet management portfolio yields were further compressed under persistently rising interest rates and flat yield curves. Furthermore, the average yield on the residential mortgage portfolio was 230 basis points below BLR for 1H06, compared with 223 basis points and 227 basis points below BLR for 1H05 and 2H05 respectively. Mild Loan growth Total loans grew 2.2% y-o-y to HK$267 billion. Due to sluggish loan growth, as of 30/6/2006, the loan-to-deposit ratio declined to 52.8% as of 30/6/2006, versus 56.8% a year earlier. Among major categories, loan outside Hong Kong saw the largest increase, up 25.4% y-o-y; whereas residential mortgages saw a 2% y-o-y decline. Decent net fee income growth Net fee income rose by 13% y-o-y at HK$1,782 million. The growth was mainly driven by stock-broking and related services (up 88% y-o-y), private banking (up at 68% y- o-y), and credit cards (up 21% y-o-y). Trading income rose by 69.4% to HK$659 million driven by foreign exchange income (up 120% y-o-y). However, net trading income realized a net loss of HK$220 million (vs. gain of HK$433 million in 1H05), as there was a HK$879 million net interest expense due to the growth in structured deposits classified as trading liabilities. Operating cost pressure Operating expenses went up 8.4% y-o-y to HK$2,338 million, mainly driven by increase in staff headcount and salaries (up 15% y-o-y). The cost-income ratio edged up to 26.8% from 26.7% a year earlier. Stable credit quality Loan impairment charges and other credit risk provisions were HK$34 million, down 88.7% y-o-y. As of 30/6/2006, impaired loan ratio was 0.4% (vs. 0.7% as of 30/6/2005) with impaired loan coverage of 73.5% (vs. 61.7% as of 30/6/2005). Mainland operations Its 15.98% stake in Industrial Bank contributed HK$209 million to net profit, up 10% y-o-y. Mainland China (ex-industrial Bank) registered a 20.6% y-o-y leap in pre-tax profit to HK$287 million, accounting for 3.8% of total pre-tax profit. Outlook & Prospects Cautious outlook on net interest margin Management hold a cautious outlook on net interest margin because of weak loan demand, abundant liquidity, and keen competition on mortgage. The Bank will focus on expanding consumer finance, commercial banking and SME services, which generate higher revenue. However, charge-off is expected to go mildly higher given their high-risk nature. Mainland business stays positive The Bank will further extend its reach with the opening of its first sub-branch in Guangzhou in August 2006 and a branch in Dongguan later this year. The Bank targets to have 30 outlets on the Mainland within 3 years, up from the expected 16 outlets by the end of 2006. The Bank has applied for a licence under the Qualified Domestic Institutional Investors scheme. The Bank is also looking for opportunity to increase its stake in Industrial Bank. Management has set a target to increase China business share in total profit to 10% within 5 years. Rich valuation Hang Seng Bank delivered satisfactory organic growth despite sluggish loan demand and difficult treasury operating environment. However, at HK$99.1, the Bank is trading at FY06E PER of 15.93X, FY06E P/Book of 4.64X and FY06E dividend of 5.4%, which are still expensive. In particular, as a dividend play, its dividend income has become relatively less attractive after a series of global rate hike. Recommendation: Hold 2
Appendix 1 I. Loans impairment allowances as a percentage of total customer advances As % of total customer advances Individually assessed Collectively assessed Gross impaired loans Overdue and rescheduled advances As of 30/06/2006 0.14% 0.19% 0.4% 0.5% As of 31/12/2005 0.20% 0.19% 0.5% 0.4% As of 30/06/2005 0.28% 0.18% 0.7% 0.5% II. Comparison of Hang Seng Bank s loan book: 30/06/2006 Vs 31/12/2005 Loans-by industry 30 th Jun, 2006 Up/(down) 31 st Dec, 2005 Property related 63,345 +1.5% 62,410 Financial concerns 2,108 +117.8% 968 Wholesale & retail trade 5,972 +7.4% 5,562 Manufacturing 6,894 +7.2% 6,429 Transport & transport equipment 11,578-2.9% 11,919 Residential mortgages, HOS/PSPS 104,155-0.0% 104,197 Credit card 7,585-1.9% 7,735 Others 28,673-6.1% 30,523 Trade finance 18,968 +19.5% 15,874 Stockbrokers 288 +30.3% 221 Loans outside HK 17,827 +12.3% 15,876 267,393 +2.2% 261,714 ======== ======== III. Comparison of Hang Seng Bank s loan book: 30/06/2006 Vs 30/06/2005 Loans-by industry 30 th Jun, 2006 Up/(down) 30 th Jun, 2005 Property related 63,345 +11.1% 57,034 Financial concerns 2,108-52.1% 4,399 Wholesale & retail trade 5,972 +13.9% 5,244 Manufacturing 6,894-11.3% 7,770 Transport & transport equipment 11,578-4.2% 12,080 Residential mortgages, HOS/PSPS 104,155-2.0% 106,258 Credit card 7,585 +15.2% 6,583 Others 28,673-7.3% 30,920 Trade finance 18,968 +12.2% 16,910 Stockbrokers 288-3.4% 298 Loans outside HK 17,827 +25.4% 14,217 267,393 +2.2% 261,713 ======== ======== 3
Appendix II Breakdown of loan book of Hang Seng Bank Stockbrokers 0.11% Trade finance 7.09% Others 10.72% Breakdown of loan book as of 30/06/2006 Total customer advances: HK$267,393 million Loans outside HK 6.67% Property related 23.69% Financial concerns 0.79% Credit card 2.84% Residential mortgages, HOS/PSPS 38.95% Wholesale Manuf acturing & retail trade 2.58% 1.79% Transport & transport equipment 4.33% Stockbrokers 0.08% Trade finance 6.07% Others 11.66% Breakdown of loan book as of 31/12/2005 Total customer advances: HK$261,714 million Loans outside HK 6.07% Property related 23.85% Financial concerns 0.37% Wholesale & retail trade 1.83% Credit card 2.96% Manuf acturing 2.46% Residential mortgages, HOS/PSPS 39.81% Transport & transport equipment 4.55% 4
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