Company Reports

We keep our fair value estimate for BOC Hong Kong, or BOCHK, at HKD 33 following 2023 results that were largely within our and market expectations, while management's outlook does not lead to much change to our near- and midterm assumptions. Dividend payout of 53% was a nice surprise, but we still expect payout to ease to around our midcycle assumption of 50%. We think BOCHK is keen to keep dividends on a growth trajectory, and this should support some investor interest. The bank's capital position—with its common equity Tier 1 ratio at 19% in 2023, which we expect to be maintained at around 16% over our five-year projected period—allows BOCHK to continue to grow its dividends. We see BOCHK as one of our preferred banks. Our fair value estimate corresponds to a 2024 price/earnings of 10.6 times, and we think price/book of 1 time is backed by return on equity of 10%-11%.

Bank of China Hong Kong's strong financial fundamentals and close connection with its parent, Bank of China, position it well, in our view, to benefit from rising economic integration between Hong Kong and the Greater Bay Area on both sides of the Pearl River. It has a long history operating in Hong Kong, where it has the second-largest market share of deposits after HSBC, and is competitive in offering cross-border banking services to its retail and wholesale clients. Its funding advantage from a large base of sticky deposits is complemented by tight cost control discipline, which has resulted in an industry-leading cost/income ratio of around 30%.

Bank of China Hong Kong's strong financial fundamentals and close connection with its parent, Bank of China, position it well, in our view, to benefit from rising economic integration between Hong Kong and the Greater Bay Area on both sides of the Pearl River. It has a long history operating in Hong Kong, where it has the second-largest market share of deposits after HSBC, and is competitive in offering cross-border banking services to its retail and wholesale clients. Its funding advantage from a large base of sticky deposits is complemented by tight cost control discipline, which has resulted in an industry-leading cost/income ratio of around 30%.

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.

Bank of China Hong Kong's strong financial fundamentals and close connection with its parent, Bank of China, position it well, in our view, to benefit from rising economic integration between Hong Kong and the Greater Bay Area on both sides of the Pearl River. It has a long history operating in Hong Kong, where it has the second-largest market share of deposits after HSBC, and is competitive in offering cross-border banking services to its retail and wholesale clients. Its funding advantage from a large base of sticky deposits is complemented by tight cost control discipline, which has resulted in an industry-leading cost/income ratio of around 30%.

Interim results from Bank of China Hong Kong, or BOCHK, were better than we expected. The earnings upside was attributable to loans growing 4.3% from year-end 2022 versus a 0.6% decline for the Hong Kong banking market as a whole, resulting in a 73-basis-point increase in BOCHK’s market share to 15.84%. Also, better-than-expected expense control brought the cost/income ratio to only 25.5%. Net interest margin dipped 3 basis points from the second half of 2022 and was up 43 basis points year on year, perhaps slightly short of the overall Hong Kong market trend for the first half of 2023 but BOCHK’s net interest income still outperformed peers given its increase in loan market share. Fee income was unsurprising, rebounding 12.5% from the second half of 2022, and annualized credit costs remained low at 14 basis points of loans. BOCHK’s capital levels also continue to be extremely strong, with the common equity Tier 1 ratio rising to 19.0%.

We maintain our narrow-moat rating for Bank of China Hong Kong, or BOCHK, after its 2022 full-year results announcement. Our unchanged fair value estimate of HKD 37 is equivalent to 1.3 times 2022 book value, which implies 10.8 times earnings assuming midcycle return on equity, or ROE, of 12% or 10 times earnings assuming ROE of 13%. With 46% upside from the current share price around 0.89 times 2022 book value, we think BOCHK looks quite attractive considering its relatively low credit risk, high capital levels, and secular prospects for regional growth both between Hong Kong and mainland China and in Southeast Asia, where BOCHK in 2016 acquired the assets previously owned by its parent.

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.

BOC Hong Kong posted a strong third quarter as it benefited from the rising rate environment. Operating profit before impairment allowances in the third quarter was strong at HKD 10.7 billion, increasing 27% against the same period last year. This was driven by a 38% increase in net interest income, partly offset by a 20% year-on-year decline in net fee income. While we had anticipated these trends, the magnitude was larger than our expectation. We expect BOC Hong Kong to continue to benefit from a higher interest rate environment, and have increased our net interest margin, or NIM, assumption to 1.34% and 1.65% in 2022 and 2023, respectively, before gradually declining from 2024 on the expectation of slower economic growth, which may lead to lower interest rates globally. Although we expect that to be offset by the lower net fee and commission income and loan growth assumptions, as we note that consumer sentiment and business activities could be dampened given macro uncertainties. As such, we retain our fair value estimate of HKD 37 for BOC Hong Kong.

The underlying trends in BOC Hong Kong’s first-half results were generally within our expectations. First-half net operating income before impairment allowances increased 8.7% year on year, mainly driven by an increase in net interest income of the same magnitude, benefiting from the rising interest rate environment. Loan growth was strong at close to 5% against the end of 2021, compared with system loan growth of 0.8%, and net interest margin, or NIM, also improved. However, higher net interest income was partly offset by a 23% decrease in net fee income due to weaker investor sentiment and the fifth wave of COVID-19 in Hong Kong. The key negative was a deterioration in asset quality, with the nonperforming loan, or NPL, ratio increasing to 0.46% from 0.27% as of end 2021. However, we believe this is manageable as the bank’s provisioning level remains high. The interim dividend of HKD 0.447 per share is unchanged from the same period last year, representing a dividend payout ratio of 50%, in the middle of a target payout of 40% to 60%.

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.

While the headline numbers in BOC Hong Kong’s fiscal 2021 results were below our forecasts, the underlying operational trends were largely within our expectations. Earnings per share of HKD 2.17 was below our forecast of HKD 2.45, but this was mainly due to more volatile items in mark to market of financial instruments and net insurance loss. From its peers’ earlier reported results, the key concern for BOC Hong Kong was the magnitude of net interest margin, or NIM, decline and a deterioration in asset quality and higher credit cost. NIM compressed amid the low interest rate environment but we expect it to gradually increase on a higher U.S. interest rate. Positively, asset quality was stable with the nonperforming loan ratio steady at 0.27%, and credit cost has declined to 0.12% from 0.16% a year ago.

With strong fundamentals and a close connection with parent Bank of China, Bank of China Hong Kong is a beneficiary of rising economic integration in the region, in our view. Key advantages for the bank are its cross-border banking services and connections with its parent bank. The bank offers a full range of banking services to retail and high quality corporate and institutional customers from Hong Kong and mainland China, amassed from its long operating history in Hong Kong. These competitive edges underpin a sticky deposit base, characterized by the second-largest market share in Hong Kong dollar deposits. The bank's funding advantage is complemented by tight cost-control discipline, resulting in an industry-leading cost/income ratio of around 30%.

With strong fundamentals and a close connection with parent Bank of China, Bank of China Hong Kong is a beneficiary of rising economic integration in the region, in our view. Key advantages for the bank are its cross-border banking services and connections with its parent bank. The bank offers a full range of banking services to retail and high-quality corporate and institutional customers from Hong Kong and mainland China, amassed from its long operating history in Hong Kong. These competitive edges underpin a sticky deposit base, characterized by the second-largest market share in Hong Kong dollar deposits. The bank's funding advantage is complemented by tight cost-control discipline, resulting in an industry-leading cost/income ratio of around 30%.

Bank of China Hong Kong’s brief third-quarter update is broadly in line with our expectations. Reported third-quarter net operating income before impairment allowances of HKD 12.6 billion represents an 8% improvement from the previous quarter. This was mainly driven by a 4.7% quarter-on-quarter increase in net interest income. Despite further decline in HIBOR with quarterly average one-month rate lowering to 7 basis points from 9 basis points in the previous quarter, net interest margins, or NIM, for BOC Hong Kong was largely stable at 1.10% in the third quarter, compared with 1.09% in the previous quarter. We maintain our full-year NIM assumption of 1.11% and we continue to assume steady increases in NIM from fiscal 2023 onward. Net fee and commission income also improved slightly quarter on quarter by 1.4%. In line with peers, there was an acceleration in operating expense increase, mainly due to higher compensation. We adjust our operating expense higher but our fair value estimate of HKD 36 is unchanged. Our full-year dividend forecast of HKD 1.26 per share is reaffirmed, implying a dividend yield of 5.1%.

Narrow-moat Bank of China Hong Kong’s, or BOCHK's, first-half results were largely in line with our expectations and we maintain our fair value estimate of HKD 36. While the bank remains undervalued, it may take time for the share price to converge toward our fair value until there is clear economic recovery in the region. The underlying fundamentals remain strong and we continue to see the bank benefiting from Southeast Asia growth and the Greater Bay Area. The bank noted account opening for cross border services saw double-digit growth while corporate cross border demand is in remittance and loans. BOCHK remains our preferred pick over Hang Seng Bank. With the operating environment broadly stabilizing, BOCHK announced interim dividend of HKD 0.447 per share, flat from last year. Our full year dividend forecast of HKD 1.26 per share is unchanged, implying a dividend payout ratio of 50% and a dividend yield of 5.3%.

With strong fundamentals and a close connection with parent Bank of China, Bank of China Hong Kong is a beneficiary of rising economic integration in the region, in our view. Key advantages for the bank are its cross-border banking services and connections with its parent bank. The bank offers a full range of banking services to retail and high-quality corporate and institutional customers from Hong Kong and mainland China, amassed from its long operating history in Hong Kong. These competitive edges underpin a sticky deposit base, characterized by the second-largest market share in Hong Kong dollar deposits. The bank's funding advantage is complemented by tight cost-control discipline, resulting in an industry-leading cost-to-income ratio of around 30%.

Ahead of the first-half results, we raise our fair value estimate for narrow-moat-rated BOC Hong Kong to HKD 36 per share from HKD 34. While there is no change in our view that net interest margin will decline on a full-year basis in 2021, we lift our medium-term net interest margin assumption to factor in market expectations of rising interest rates at the end of 2022. This should start flowing through to net interest margin in 2023. The magnitude of the increase is dependent on the level of system liquidity, competition on deposits, and also pricing on the asset side. Our 2021 dividend forecast of HKD 1.26 per share is reaffirmed, which represents a dividend yield of 4.9% at the current share price of HKD 25.75. Our dividend forecast assumes a payout ratio of 50%, at the midpoint of the bank’s guidance of 40%-60%. With a strong capital position and more certainty on the current COVID-19 situation, there may be some upside in the bank opting for a higher dividend payout as earnings are expected to be flat in 2021.

BOC Hong Kong, or BOCHK’s, brief first quarter update was largely in line with our expectations. Operating profit before impairment allowance of HKD 9.6 billion in the first quarter should see the bank meet our previous full year forecast of HKD 52.9 billion. However, the mix of the income did vary from our expectation. The positive was the strong increase in net fee and commission income of 30% against the same period last year to HKD 3.7 billion. This was mainly driven by the strong market sentiment during the quarter, which underpinned higher-than-expected growth in commission income from securities brokerage, funds distribution and insurance. We have increased our fee income growth assumption for 2021, given the strong performance in the first quarter.

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.