Company Reports

Hang Seng Bank's proposed share buyback of up to HKD 3 billion was unexpected but positive. The bank has not been buying back shares despite a comfortable capital position, with a common equity Tier 1 ratio above 16%. While the buyback is relatively immaterial—it equates to around 1.7% of the bank's share base at the current share price—we think it opens the door for future buybacks, and as such, investors are likely to rerate Hang Seng Bank positively. We keep our fair value estimate at HKD 110 per share, given the limited impact, and see further upside for the narrow-moat bank. At our fair value estimate, Hang Seng Bank would trade at 1.3 times 2024 book value, which we believe is supported by a return on equity of 12%-13% and an attractive dividend yield of 5.9%.

Hang Seng Bank's 2023 results reflected stronger net interest margin, or NIM, than expected. We think this helped propel its share price up more than 9% on the afternoon of the results release. We now factor in a more resilient NIM in 2024 partly offset by higher credit cost and slower loans growth. But we also anticipate a pick-up in mainland China and Hong Kong economic activity from 2025 coupled with falls in the US interest rates that should allow loans growth to recover and help offset declining NIM. These assumptions lead to a 4.6% rise in our 2024 net profit forecast and minimal changes in later years. We expect return on equity to hover around 12%-13% over the next five years. Our fair value estimate remains at HKD 110, which prices Hang Seng Bank at 1.3 times 2024 price/book. We think this is fair, given average ROE of 12.6% for 2024-28. We remain buyers of Hang Seng Bank at its current price level. 2023 dividend per share of HKD 6.50 is yielding an attractive 7.3% at the HKD 89.30 share price.

Hang Seng Bank has a track record of prudently managing risks and lending conservatively that enabled it to emerge unscathed from the Asian financial crisis of 25 years ago and the global financial crisis. Unlike most of its peers, it did not need to raise equity at a discount to repair its balance sheet after 2008. The bank's cost-efficient operations are supported by a large deposit base, mainly from low-cost current and savings accounts, and its profitability in Hong Kong has consistently outperformed most of its peers.

Hang Seng Bank has a track record of prudently managing risks and lending conservatively that enabled it to emerge unscathed from the Asian financial crisis of 25 years ago and the global financial crisis. Unlike most of its peers, it did not need to raise equity at a discount to repair its balance sheet after 2008. The bank's cost-efficient operations are supported by a large deposit base, mainly from low-cost current and savings accounts, and its profitability in Hong Kong has consistently outperformed most of its peers.

Hang Seng Bank has a track record of prudently managing risks and lending conservatively that enabled it to emerge unscathed from the Asian financial crisis of 25 years ago and the global financial crisis. Unlike most of its peers, it did not need to raise equity at a discount to repair its balance sheet after 2008. The bank's cost-efficient operations are supported by a large deposit base, mainly from low-cost current and savings accounts, and its profitability in Hong Kong has consistently outperformed most of its peers.

We have updated our models for Hong Kong banks in our coverage. Our fair value estimates for HSBC and Standard Chartered are unchanged, but we've cut our fair value for BOC Hong Kong by 7% to HKD 33 and for Hang Seng Bank by 19% to HKD 110. Despite these adjustments, we maintain the view that all banks are undervalued at current prices, with BOCHK showing the greatest potential upside.

We lower our fair value estimate for Hang Seng Bank, or Hang Seng Bank, to HKD 136 from HKD 148 after its interim 2023 earnings, still about 23% upside from the current share price and indicating that we view the shares as attractive at present. We value Hang Seng Bank at a price/book ratio of 1.63 times and assume midcycle return on equity of 12.5%. This equates to a midcycle price/earnings ratio of 13 times, and a midcycle dividend yield of 5.4% on our assumption that Hang Seng Bank maintains a 70% payout ratio.

Hang Seng Bank has a track record of prudently managing risks and lending conservatively that enabled it to emerge unscathed from the Asian financial crisis of 25 years ago and the global financial crisis. Unlike most of its peers, it did not need to raise equity at a discount to repair its balance sheet after 2008. The bank's cost-efficient operations are supported by a large deposit base, mainly from low-cost current and savings accounts, and its profitability in Hong Kong has consistently outperformed most of its peers.

Shares of Asian banks in our coverage declined again Thursday morning after Credit Suisse’s 24% drop overnight to below CHF 1.70 per share reignited concerns about global financial stability that emerged last week with the failure of Silicon Valley Bank. In terms of systemic risk, we see very low risk of bank runs occurring anywhere in Asia given policy support from each government and the absence of problematic large institutions like Credit Suisse which could become vectors of contagion. Japanese banks are the most susceptible in Asia, in our view, to worries over financial stability in the United States or Europe due to their greater linkages with these regions. Next in terms of vulnerability, in our view, is the Korean banking system, which depends on having access to U.S. dollar liquidity. However, we think the U.S. Federal Reserve, or the Fed, can be relied upon to set up a currency swap arrangement with the Bank of Korea again if needed to ensure stability. The Fed has a continuous unlimited swap agreement with the Bank of Japan.

We maintain our narrow moat rating for Hang Seng Bank and reduce our fair value estimate to HKD 148 from HKD 177, equivalent to 1.78 times book value as of the end of 2022 and 12% above the current share price, upon change of coverage analyst. We continue to view Hang Seng Bank as deserving of its Exemplary capital allocation rating in view of management’s well-balanced approach that maintains a strong balance sheet through prudent risk management, while simultaneously making appropriate investments in future growth and also delivering high distributions to shareholders including to its 62% parent, HSBC. Hang Seng Bank’s narrow economic moat comes from its funding advantage in Hong Kong, where it is able to attract sticky low-cost deposits that help it generate net interest margins above the market average.

Hang Seng Bank has a track record of prudently managing risks and lending conservatively that enabled it to emerge unscathed from the Asian financial crisis of 25 years ago and the global financial crisis. Unlike most of its peers, it did not need to raise equity at a discount to repair its balance sheet after 2008. The bank's cost-efficient operations are supported by a large deposit base, mainly from low-cost current and savings accounts, and its profitability in Hong Kong has consistently outperformed most of its peers.

Prudent management, conservative lending policy, and a strong record in risk management saw Hang Seng Bank emerge from previous financial crises unscathed. Unlike its global peers in the 2008 global financial crisis, the bank did not have to raise equity at steep discounts to repair its balance sheet. The bank's efficient, low cost operation is supported by a large deposit base, mainly derived from low-cost and sticky current and savings accounts. This has resulted in high profitability relative to peers, with return on common equity consistently above the bank's cost of equity.

Prudent management, conservative lending policy, and a strong record in risk management saw Hang Seng Bank emerge from previous financial crises unscathed. Unlike its global peers in the 2008 global financial crisis, the bank did not have to raise equity at steep discounts to repair its balance sheet. The bank's efficient, low cost operation is supported by a large deposit base, mainly derived from low-cost and sticky current and savings accounts. This has resulted in high profitability relative to peers, with return on common equity consistently above the bank's cost of equity.

Hang Seng Bank’s first-half results were below our expectations, with net profit declining 46% against the same period last year. While we had expected weaker fees, the near 30% decline in net fee income was more severe than our anticipation as bank branches were closed during the fifth wave and economic uncertainties led to weaker investor sentiment. Management noted it expects challenges to remain for the second half, given inflationary pressure and geopolitical tensions. We continue to see the higher interest rate environment as a positive near-term driver for Hang Seng Bank. We expect higher rates to continue to flow through to Hibor in the second half, and accelerate in 2023, thus pushing the bank’s net interest margin, or NIM, further higher. We have revised our assumptions for higher NIM, though this is offset by a weaker fee income and loan growth assumptions and higher credit cost. Our fair value estimate for Hang Seng Bank is maintained at HKD 177 but we lower our 2022 dividend forecast slightly to HKD 5.44. This implies the bank trades at a 26% discount to our fair value estimate and a 4.2% dividend yield, as at the close of business on Aug. 1.

Our long-term view on Hang Seng Bank is unchanged and we continue to expect the bank to benefit from a rising interest-rate environment in the near term, though uncertainty over economic growth in the medium term remains.

We believe that the 10% drop in Hang Seng Bank’s, or HSB’s, share price on Tuesday following disappointing results is unwarranted, and the shares are looking more attractive although investors may want more of a risk buffer before buying. Second-half 2021 performance fell short of both our and the market’s expectations mainly due to higher credit costs and weaker net fee income, which also led to a lower-than-expected dividend of HKD 5.10 per share. We cut our 2022 net profit estimate by 10% to reflect the pandemic challenges in Hong Kong. However, we think HSB’s net interest margins, or NIM, will benefit from the rising interest rate environment from 2023 onward and raise our fair value estimate to HKD 177 from HKD 163. We see EPS growing at an average 19% from 2023 to 2026 as the impact of rate increases flow through.

Prudent management, conservative lending policy, and a strong record in risk management saw Hang Seng Bank emerge from previous financial crises unscathed. Unlike its global peers in the 2008 global financial crisis, the bank did not have to raise equity at steep discounts to repair its balance sheet. The bank's efficient, low cost operation is supported by a large deposit base, mainly derived from low-cost and sticky current and savings accounts. This has resulted in high profitability relative to peers, with return on common equity consistently above the bank's cost of equity.

Prudent management, conservative lending policy, and a strong record in risk management saw Hang Seng Bank emerge from previous financial crises unscathed. Unlike its global peers in the 2008 global financial crisis, the bank did not have to raise equity at steep discounts to repair its balance sheet. The bank's efficient, low-cost operation is supported by a large deposit base, mainly derived from low-cost and sticky current and savings accounts. This has resulted in high profitability relative to peers, with return on common equity consistently above the bank's cost of equity.

Hang Seng Bank’s first-half results were within our expectations. Profit before tax of HKD 10.3 billion was down 3% year on year, but represented a 17% increase on a half-on-half basis. The bank’s profit benefited from lower expected credit loss charge of HKD 339 million, down from HKD 1.76 billion and HKD 978 million in the first and second half of fiscal 2020, respectively. Net interest income was down 19.7% year on year, due to an expected decline in net interest margin on a year-on-year basis. The decline was offset by a 16.8% year-on-year increase in net fee income, ahead of our previous estimates. As expected, net fee income growth was led by investment and credit card related fee income, which collectively increased 22.1% year on year. The bank declared a second-quarter dividend of HKD 1.10 per share, in line with the first-quarter dividend and our revised forecast in late July.

Ahead of the first-half result, we lift Hang Seng Bank’s fair value estimate by 6.5% to HKD 163 per share, as we factor in a higher net interest margin, or NIM, in 2024 and 2025. With the bank previously announcing a first-quarter dividend of HKD 1.10 per share, compared with HKD 0.80 per share in the second and third quarter of last year, we lift our full-year dividend payout to 65% from 60% and forecast a dividend of HKD 6.31 per share, an increase from HKD 5.83 per share previously. The bank’s Pillar 3 statement for the first quarter showed a slight decline in risk-weighted assets, but this is mainly due to a lower debt securities balance. There is no change to the bank’s strong capital position, with the common equity Tier 1 ratio at 16.6%, as of March 31, 2021. Its liquidity position is also solid with the liquidity coverage ratio and net stable funding ratio both well above 100%.