9/F, 10 Des Voeux Road Central, Hong Kong. Dealing: 3608 8000 Research: 3608 8097 Facsimile: 3608 6113 HONG KONG RESEARCH Analyst: Paul Sham 25 th March 2011. BOC HONG KONG (HOLDINGS) LIMITED ( 中銀香港 ) Sector : Banking Chairman : Mr. Xiao Gang HKSE Code : 02388 Market Price : HK$24.40 (25/03/2011) Vice Chairman & Chief Executive : Mr. He Guangbei Shares Issued : 10,572.8m Mkt. Cap. : HK$257,976.3m 52 weeks Hi/ Lo : HK$29.40 / HK$16.16 HSI : 23,158.67 (25/03/2011) Main Business : Banking and related financial services SUMMARY OF THE FINAL RESULTS FOR THE YEAR ENDED 31 ST DECEMBER 2010 Final Results Highlights Vs FY2009 (%) Vs 30/06/2010 (%) Net interest income 18,734 +4.5% Non-interest income 8,774 +8.0% Total operating income 27,508 +5.6% Operating expenses (9,584) -21.1% Operating profit before impairment losses 17,924 +28.8% Net reversal of loan impairment allowance 70 NA* Profit before taxation 19,742 +18.0% Taxation (3,052) +14.0% Attributable profit to shareholders 16,196 +18.0% Total loans 613,219 +19.1% +7.3% Total deposits 1,027,501 +21.4% +15.0% Total assets 1,661,040 +37.0% +27.6% Basic EPS (HK$) 1.5319 +18.0% Final DPS (HK$) 0.572 +0.4% Total DPS (HK$) 0.972 +13.7% Selected Ratios FY2010 FY2009 1H2010 Net interest margin 1.49% 1.69% 1.58% Cost-income ratio 34.8% 46.6% 36.2% Return on average assets 1.21% 1.21% 1.17% Return on average equity 14.8% 14.8% 13.7% Impaired loan ratio 0.14% 0.34% 0.23% Impaired advances coverage 266.6% 128.3% 173.8% Loan-deposit ratio 59.7% 60.8% 64.0% Capital adequacy ratio 16.1% 16.9% 16.2% Average liquidity ratio 38.8% 40.2% 37.8% Remarks: (*) BOCHK recorded a net reversal of loan impairment allowances of HK$70 million versus a HK$103 million net charge in 2009 FY10 results ahead market expectations FY10 net profit of Bank of China (Hong Kong) (BOCHK) came in at HK$16,196m, up 18% y-o-y, ahead of the market consensus of HK$15,007m. The beat can be attributable to better-than-expected net interest income, controlled expenses, improved asset quality and provision write-back. In addition to the interim dividend of HK$0.40 per share, BOCHK declared the final dividend of HK$0.57 per share, representing a payout ratio of 63.5% (similar to FY09 s 64.9%). 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.
Net interest income increased by 4.5% Owing to the low interest rates in the market throughout 2010, net interest margin (NIM) narrowed by 20bps to 1.49%. Stripping out the impact of BOCHK s RMB clearing function, the NIM would have been 1.59%, down 15bps y-o-y. Thanks to the 18.6% y-o-y growth in average interest-earning assets, the adverse impact of the narrowed NIM on net interest income was completely offset. Strong growth in RMB deposit BOCHK s leading market share of offshore RMB deposits led to the rapid asset growth (+37% y-o-y) during FY10. Deposit growth was one of the highlights in the results, growing 21.4% y-o-y and 15% h-o-h. Its RMB deposit base even grew tremendously by 304% y-o-y. Loan growth of 19% is slower than system loan growth of 29%. Cross border business was the key driver of the loan growth, with trade finance up 89.1% y-o-y and loans for use outside Hong Kong up 29.4% y-o-y. As of end-2010, loan-to-deposit ratio fell to 59.7% from 60.8% a year earlier. Brokerage income was the major drag in fee income Non-interest income registered only mild increase in FY10, up 5.6% y-o-y. BOCHK s primary fee income contributor, securities brokerage fee, fell 9.8% y-o-y. The brokerage business was lukewarm in 1H10 but was followed by a strong rebound of 17.7% in 2H10. Credit card fees recorded strong growth of 32.6%, which helped offset the disappointment in brokerage income. BOCHK reported net trading gain of HK$1,369m, down 7.8% y- o-y, which was mainly caused by the decrease of HK$274m or 21.5% from foreign exchange and related products. Normalized cost-to-income ratio Operating expenses fell 21.1% y-o-y largely due to the significant decline in expenses incurred for Lehman Brothers-related products. Excluding such expense, core operating expenses would have increased by 7.1%. Staff costs increased by HK$266m or 5.2%, primarily due to more human resources input for business growth and higher performance-related incentives. Compared to the end of 2009, headcount measured in full-time equivalents rose by 562 to 13,806 at the end of 2010. Cost-to-income ratio of BOCHK fell to 34.8% in FY10, compared with 46.6% in FY09. Asset quality further improved A net reversal of individual allowance for HK$149m was registered in 2010 under an improved economic environment. Nevertheless, there was higher net charge of collective allowance owing to the expansion of the loan portfolio and the re-estimation of parameter values in the assessment model in 2H10. BOCHK reported improvement in asset quality with decline in both impaired loan amount (down 51% y-o-y) and ratio (0.14% at end- 2010 versus 0.34% at end- 2009). Solid financial position The tier 1 CAR and total CAR for BOCHK was 11.3% and 16.14% respectively. The Group s total capital base expanded by 6.8% to HK$111,487m mainly due to the increase in retained earnings. Meanwhile, risk-weighted assets for credit risk increased by 12.1% to HK$648,236m, as a result of the growth in advances to customers. Outlook & Prospects NIM remains dim Management guided NIM was steady in the first two months of 2011. Given keen competition especially in mortgage loan business and low US treasury investment return resulting from the low US federal fund rate, BOCHK is unlikely to deliver a notable rebound in NIM this year. Regarding the loan growth, BOCHK s loan-to-deposit ratio of 60% is among the lowest in the local banking sectors. This should leave room for loan growth and help support its net interest income in FY11. Mixed outlook for fees The outlook for BOCHK s fee income will likely remain mixed in the near term. Brokerage business should remain muted as tighter monetary environment in China dampened the buying sentiments. Also, it is obvious that the market share of BOCHK s brokerage business is being taken up by other banks and brokerage houses amid fierce price competition. On a more positive note, BOCHK s card fees should perform well in the near term given a buoyant labour market. Overall speaking, only moderate growth in fee income could be expected in FY11. 2
RMB business is a longer term positive BOCHK has a clear advantage over its Hong Kong peers in developing RMB business in the long run as it is the only RMB clearing bank in Hong Kong. The bank is now emerging as one of the leading offshore RMB franchises, thanks to its parent s mainland customer connections and its relatively large Hong Kong network. Though the current scale and investment channels of offshore RMB in Hong Kong bring limited benefits to BOCHK, the rapid growth in RMB deposits can be an important source of asset growth of BOCHK. Moreover, the coming greater availability of offshore RMB usage and investment vehicles in Hong Kong will likely raise the net interest margin and fee income of BOCHK in the long run. Valuations BOCHK is trading at 2.2x FY11E P/B and 14.8x FY10E P/E. Given the banks strong positioning in terms of offshore RMB market share, solid fundamentals and its mid-teen ROE, we believe the valuations are 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 31/12/2010 0.05% 0.32% 0.14% 0.11% As of 30/06/2010 0.09% 0.31% 0.23% 0.19% As of 31/12/2009 0.13% 0.31% 0.34% 0.27% II. Comparison of BOC Hong Kong s loan book: 31/12/2010 vs 31/12/2009 Loans-by industry 31 st Dec, 2010 Up/(down) 31 st Dec, 2009 Property related 96,807 +1.7% 95,188 Financial concerns 9,011 +99.4% 4,518 Wholesale & retail trade 24,300 +64.0% 14,819 Manufacturing 15,125 +14.9% 13,159 Transport & transport equipment 23,409-16.9% 28,179 Residential mortgages, HOS/PSPS 159,715 +14.8% 139,145 Credit card 8,230 +12.0% 7,348 Others 49,934 +0.8% 49,553 Trade finance 53,396 +82.1% 29,321 Stockbrokers 556 +84.7% 301 Loans outside HK 172,736 +29.4% 133,441 613,219 +19.1% 514,972 III. Comparison of BOC Hong Kong s loan book: 31/12/2010 vs 30/06/2010 Loans-by industry 31 st Dec, 2010 Up/(down) 30 th June, 2010 Property related 96,807-4.3% 101,113 Financial concerns 9,011-54.4% 19,754 Wholesale & retail trade 24,300-11.0% 27,309 Manufacturing 15,125-45.7% 27,833 Transport & transport equipment 23,409-11.7% 26,519 Residential mortgages, HOS/PSPS 159,715 +11.6% 143,063 Credit card 8,230 +15.2% 7,143 Others 49,934-20.9% 63,156 Trade finance 53,396 +35.9% 39,285 Stockbrokers 556-56.9% 1,291 Loans outside HK 172,736 +50.2% 115,020 613,219 +7.3% 571,486 4
Appendix II Breakdown of loan book of BOC Hong Kong Breakdown of Loan Book as of 31/12/2010 Total customer advances: HK$613,219 million Loans outside HK 28.2% Property related 15.8% Financial concerns 1.5% Whoelsale & retail trade 4.0% Manufacturing 2.5% Trade finance 8.7% Others 8.1% Credit card 1.3% Residential mortgages, HOS/PSPS/TPS 26.0% Transport and transport equipment 3.8% Breakdown of Loan Book as of 31/12/2009 Total customer advances: HK$514,972 million Loans outside HK 25.9% Property related 18.5% Financial concerns 0.9% Whoelsale & retail trade 2.9% Trade finance 5.7% Others 9.6% Credit card 1.4% Residential mortgages, HOS/PSPS/TPS 27.0% Transport and transport equipment 5.5% Manufacturing 2.6% 5
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