9/F, 10 Des Voeux Road Central, Hong Kong. Dealing: 3608 8000 Research: 3608 8098 Facsimile: 3608 6132 HONG KONG RESEARCH Analyst: Kelvin Li 18 th August 2006 WING HANG BANK LIMITED ( 永亨銀行 ) Sector : Banking Chairman and Chief Executive : Dr. Patrick Y. B. Fung HKSE Code : 0302 Market Price : HK$77.70 (17/08/2006) Deputy Chief Executive : Mr. Frank J. Wang Shares Issued : 294.12 million Mkt. Cap. : HK$22,853 million 52 weeks Hi/Lo : HK$79.50 / HK$52.30 HSI : 17,373.05 (17/08/2006) Main Business : Banking and related financial services SUMMARY OF THE INTERM RESULTS FOR THE SIX MONTHS ENDED 30 TH JUNE 2006 Interim Results Highlights Vs 1H2005 (%) Vs FY2005 (%) Total net interest income 1,020.2 +16.3% Non-interest income 454.0 +3.7% Total operating income 1,474.1 +12.1% Operating expenses (518.2) +8.2% Operating profit before impairment allowances 955.9 +14.3% Impairment losses and allowances (0.8) N/A Attributable profit 817.4 +16.7% Total loans 56,071 +8.6% +3.1% Total deposits 96,202 +13.9% +7.5% Total assets 111,427 +12.6% +6.8% EPS (HK$) HK$2.78 +16.7% Interim DPS (HK$) HK$0.82 +17.1% Selected Ratios 1H2006 1H2005 FY2005 Net interest margin 1.83% 1.86% 1.88% Impaired loan ratio 0.86% 1.51% 1.03% Impaired loan coverage 58.1% 45.8% 58.5% Return on average assets 1.51% 1.45% 1.35% Return on average equity 19.1% 18.5% 17.1% Loan-deposit ratio 58.3% 61.2% 60.8% Cost-income ratio 35.2% 36.4% 37.2% Capital adequacy ratio 15.1% 15.3% 14.9% Average liquidity ratio 50.8% 49.8% 50.8% 1H2006 profit grew on higher net interest income Wing Hang Bank reported a 16.7% y-o-y growth in net profit to HK$817.4 million for the six months ended 30 th June 2006 from HK$700.6 million a year earlier, thanks to a surge in net interest income. In fact, the first-half bottom line was better than market expectations of HK$744 million. Flat dividend payout ratio 1H2006 EPS was HK$2.78, against HK$2.38 a year earlier. The bank proposed an interim dividend of HK$0.82 per share, up from HK$0.70 a year earlier. As a result, the dividend payout ratio was little changed at 29.5% (1H05: 29.4%). 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 stayed under pressure Net interest income of the Bank surged 16.3% y-o-y to HK$1.0 billion in the first half, mainly driven by loan growth. Wang Hang Bank s net interest margin, however, was narrowed by 3 basis points y-o-y to 1.83% in 1H06, despite widening Prime-HIBOR spread, as a flatter yield curve reduced income from its treasury operations and pricing pressure on mortgage business persisted. Total loans up a mild 3.1% h-o-h Loan book of Wing Hang Bank grew by 3.1% h-o-h to HK$56.1 billion, thanks to a 4.4% rise in mortgage lending and 8.3% growth in loans outside Hong Kong. Residential mortgage amounted to HK$16.1 billion as of 30/06/2006, mainly driven by introduction of new products like HIBOR-Linked Mortgage. The strong growth in loans outside Hong Kong was attributable to the Bank s Macau and Mainland operations. Meanwhile, total deposits increased by 7.5% h-o-h to HK$96.2 billion. As a result, the loan-to-deposit ratio fell to 58.3% as of 30/06/2006 from 60.8% as of 31/12/2005. Non-interest income up slightly in 1H06 Non-interest income grew a mere 3.7% y-o-y to HK$454 million in 1H06, as higher brokerage commission and FX income offset lower loan commission and dealing income. Cost-income ratio dropped Operating expenses increased 8.2% y-o-y to HK$518 million, due to a 5% y-o-y rise in the total number of employees as well as higher costs under the Employee Incentive Plan. Along with a 12.1% y-o-y gain in total operating income, the Bank s cost-income ratio improved to 35.2% in 1H06 from 36.4% a year earlier. Encouraging results from Macau operations In geographical terms, profit contribution from Macau totalled HK$128 million in 1H06, up 24.1% y-o-y and accounting for 13% of the Bank s total, thanks to encouraging results of Banco Weng Hang. For the first half, Banco Weng Hang reported 15.7% h-o-h rise in total loans, while its net interest margin widened to 2.17% in 1H06 from 1.99% a year earlier. Healthy asset quality In the first half, WHB reported an impairment charge of only some HK$763,000, thanks to robust economic environment and stable property prices. The Bank s impaired loan ratio dropped to 0.86% as of 30/06/2006, from 1.03% by the end of last year. Outlook & Prospects Better outlook for Treasury operations in 2H06 Owing to a flattening yield curve, treasury division of the Bank reported a 35% drop in operating income and a 34% y-o-y plunge in profit before tax, which also depressed the Bank s overall net interest margin in the first half. However, given a clearer interest rate outlook and higher rates, the Bank s treasury operation should have a more favourable operating environment and should be picking up steam in 2H06. Mainland and Macau business the next growth driver Thanks to the fast-growing economy, the Bank s Macau business continued to perform well in 1H06. The Group is planning to add one more branch to its 11-branch network in Macau, in order to strengthen its consumer network and grasp booming business opportunities in the territory. Meanwhile, the Bank continues its expansion efforts in China. The Guangzhou branch is scheduled to commence operations by 4Q 2006, and the Bank plans to open one more branch in Beijing next year. It will double the number of outlets on the Mainland to 4 and extend its presence in major cities of China. Full valuation but caution ahead Share price of Wing Hang Bank has rallied nearly 40% so far in 2006, as investors are expecting strong financial fundamentals, better operating environment in HK and robust overseas growth. Despite a sound 1H06 ROE at 19.1%, we remained cautious about the Bank s outlook, as the trend may not sustain given the fact that the Bank is planning to speed up its China expansion, which may incur higher costs and so pressure on profit margin in the near term. Meanwhile, salary and rental pressure in Macau may also have a negative impact on the bottom line. Trading at 14x FY06E P/E and a rich FY06E P/B ratio of 2.5x, we recommend investors to take profit on the counter. Recommendation: Take Profit 2
Appendix 1 I. Impairment allowances, Gross impaired loans, overdue and rescheduled advances of Wing Hang Bank As % of total customer advances Individual impairment allowances Collectively impairment allowances Gross impaired loans Overdue and rescheduled advances As of 30/06/2006 0.17% 0.33% 0.86% 0.63% As of 31/12/2005 0.22% 0.38% 1.03% 0.86% As of 30/06/2005 0.31% 0.38% 1.51% 1.35% II. Comparison of Wing Hang 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 10,159-1.2% 10,281 Financial concerns 1,099 +115.9% 509 Wholesale & retail trade 815-2.6% 836 Manufacturing 1,478 +1.1% 1,461 Transport & transport equipment 2,850 +0.8% 2,828 Residential mortgages, HOS/PSPS 16,098 +4.4% 15,418 Credit card 299-22.5% 386 Others 5,884-8.4% 6,422 Trade finance 3,129 +2.3% 3,057 Stockbrokers 566 +0.4% 564 Loans outside HK 13,695 +8.3% 12,640 56,071 +3.1% 54,402 ======== ======== III. Comparison of Wing Hang 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 10,159 +4.4% 9,729 Financial concerns 1,099 +69.6% 648 Wholesale & retail trade 815-5.1% 858 Manufacturing 1,478 +7.2% 1,379 Transport & transport equipment 2,850-1.8% 2,902 Residential mortgages, HOS/PSPS 16,098 +2.8% 15,665 Credit card 299-6.8% 321 Others 5,884-7.6% 6,365 Trade finance 3,129 +9.6% 2,854 Stockbrokers 566 +13.9% 497 Loans outside HK 13,695 +31.3% 10,434 56,071 +8.6% 51,653 ======== ======== 3
Appendix II Breakdown of loan book of Wing Hang Bank Breakdown of loan book as of 30/6/2006 Total customer advances: HK$56,071 million Stockbrokers 1.0% Trade finance 5.6% Loans outside HK 24.4% Others 10.5% Credit card 0.5% Property related 18.1% Residential mortgages, HOS/PSPS 28.7% Financial concerns 2.0% Wholesale & retail trade 1.5% Manuf acturing 2.6% Transport & transport equipment 5.1% Breakdown of loan book as of 31/12/2005 Total customer advances : HK$54,402 million Stockbrokers 1.0% Loans outside HK 23.2% Property related 18.9% Financial concerns 0.9% Wholesale & retail trade 1.5% Manuf acturing 2.7% Trade finance 5.6% Others 11.8% Credit card 0.7% Residential mortgages, HOS/PSPS 28.3% Transport & transport equipment 5.2% 4
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