BOC Hong Kong's Fiscal 2020 Largely in Line; Asset Quality Remains Prudent

Bank of China Hong Kong's, or BOC Hong Kong's, fiscal 2020 result was largely in line with our expectations. Our fair value estimate is unchanged at HKD 34.50 per share, which reflects a price/book of 1.4 times. There is no change in our expectation on an improvement in fiscal 2021 net profit from fiscal 2020. We continue to expect net interest income to decline in fiscal 2021 with stronger loan growth not enough to offset a decline in the net interest margin, or NIM. Management did not provide specific guidance on the net interest margin but expects the low interest-rate environment to persist and interbank rates to remain low in 2021. The aggregate balance remained elevated at HKD 457 billion in February and we have factored in a decline in the net interest margin in our model, though the magnitude of the decline in fiscal 2020 was higher than anticipated. As such, we revise our forecast to 1.16% from our previous forecast of 1.4%. More optimistic was loan growth guidance of high single digits as economies in the region improve and the bank increases its exposure in Southeast Asia. We continue to see the latter as a point of differentiation against the local Hong Kong banks and underpin BOC Hong Kong’s above system loan growth. The final dividend of HKD 0.795 per share takes the full-year dividend to HKD 1.242 per share. Our 50% payout ratio is unchanged and we forecast a dividend of HKD 1.22, representing a dividend yield of 4.4%. With risk-return remaining attractive, we maintain BOC Hong Kong as our preferred pick among the local banks.