BOC Hong Kong’s First-Quarter Update Within Expectations

The overall trends in BOC Hong Kong’s brief first-quarter update were within our expectations. Despite the COVID-19 situation in Hong Kong, the bank managed to deliver a 6% increase in net operating income before impairment allowances against last year to HKD 14 billion. This was led by a 4.1% increase in net interest income as net interest margin, or NIM, increased 2 basis points from the previous quarter to 1.08%. This more than offset the year-on-year decline in net fee and commission income. The result was in line with our view that net interest income growth is supported as interest rates gradually increase, while COVID-19 disruptions in Hong Kong are likely to see weaker wealth management-related and credit card fees for the bank in the first quarter. Expected credit cost for the quarter increased to HKD 0.9 billion, implying annualized credit cost of 0.23% on total loans. This compares with full-year credit cost of 0.12% at the end of 2021. Provisions increased during the quarter as the bank factored in uncertainties around the weaker macroeconomic situation in the first quarter. Positively, impaired loan ratio was benign at 0.27%, unchanged from end-December and in line with peers in the region. As such, we have finetuned our assumptions while our fair value estimate of HKD 37 for BOC Hong Kong is unchanged. At a 19% discount to our fair value estimate, we think the bank remains attractive at the current price, as a rising interest rate and recovery in the local economy would lift profitability for the bank in the coming years.