Date: 14 October 2024
Broker: OCBC Investment Research
Company Overview
Hang Seng Bank (HSB) is the second-largest domestic bank in Hong Kong, with over 200 outlets in the region and approximately 50 outlets in China. Around 80% of the bank’s earnings come from Hong Kong. HSB offers a range of traditional and non-traditional banking services, including life insurance, credit and smart cards, investment accounts, mortgages, and auto loans. HSBC Holdings PLC owns 62.3% of Hang Seng Bank. The bank leads industry peers in capitalizing on green financing initiatives such as sustainability-linked loans.
Rating and Valuation
- Rating: BUY (as of 14 October 2024)
- Last Close: HKD 97.30
- Fair Value: HKD 114.00
- Market Cap: HKD 183.1 billion
- Free Float: 37%
- Top Shareholder: HSBC Holdings PLC (63.51%)
Investment Thesis
HSB has higher sensitivity to market rates and significant exposure to Hong Kong-focused businesses, making it vulnerable to sluggish economic growth in the region. However, its decent dividend yield and management’s guidance for stable dividends per share (DPS) support its valuation premium relative to peers.
Financial Performance (2023–2025 Projections)
- Net Interest Income:
- 2023: HKD 32.3 billion
- 2024: HKD 30.8 billion
- 2025: HKD 29.4 billion
- Pre-Provision Profits:
- 2023: HKD 26.2 billion
- 2024: HKD 24.5 billion
- 2025: HKD 23.3 billion
- Attributable Profits:
- 2023: HKD 17.1 billion
- 2024: HKD 16.4 billion
- 2025: HKD 16.8 billion
- Earnings Per Share (EPS):
- 2023: HKD 9.0
- 2024: HKD 8.7
- 2025: HKD 9.1
- Dividends Per Share (DPS):
- 2023: HKD 6.5
- 2024: HKD 6.5
- 2025: HKD 6.6
Key Ratios (2023–2025)
- Return on Average Assets (ROAA): 1.0% (2023–2025)
- Return on Average Equity (ROAE): 2023: 11.3%, 2024: 10.6%, 2025: 10.7%
- Net Interest Margin (NIM): 2023: 2.3%, 2024: 2.3%, 2025: 2.1%
- Non-Performing Loan (NPL) Ratio: 2023: 2.8%, 2024: 6.0%, 2025: 5.5%
- Core Tier-1 Ratio: 2023: 18.1%, 2024: 16.7%, 2025: 16.2%
Recent Developments
Limited Impact from Prime Rate Cut
Following a 25 basis points (bps) prime rate cut by Hong Kong banks in September 2024, HSB’s net interest margin (NIM) is expected to remain largely neutral, with only a modest increase of around 1 bps. The 25 bps cut in mortgage rates should also lead to a 25 bps reduction in mortgage rates. The outlook for NIM in 2025 remains cautious, with the expectation that the U.S. Federal Reserve will implement additional rate cuts in the coming months.
Asset Quality Concerns
HSB’s asset quality has deteriorated, particularly in its Hong Kong commercial real estate (CRE) exposure. While the 1H24 credit cost was lower than expected at 35 bps (compared to 42 bps in 1H23), the NPL ratio rose significantly, particularly in the Hong Kong CRE sector, where the NPL ratio surged to 9.6% in 1H24, up from just 0.8% in 2H23. This is seen as a shift from concerns around China’s CRE exposure to a more localised issue in Hong Kong.
CET1 and Capital Management
The Common Equity Tier-1 (CET1) ratio fell to 16.6% in 1H24, down 1.5 percentage points from the previous period, primarily due to risk-weighted asset inflation. Although the CET1 ratio remains strong, there is growing uncertainty over HSB’s asset quality, which could impact future capital management strategies.
ESG Integration
HSB leads its peers in integrating Environmental, Social, and Governance (ESG) factors into its financing activities. The bank’s commercial loan book had a low environmental intensity in 2023, with about 57.4% of loans directed towards sustainability-linked initiatives. However, the bank faces challenges in staff management, lagging behind peers in talent pipeline development and experiencing a significant increase in customer complaints in recent years.
Investment Risks
- Further deterioration in asset quality, particularly in Hong Kong property-related loans.
- A slower-than-expected pace of interest rate hikes, which could pressure NIM expansion.
- Tighter regulatory requirements that could affect the bank’s capital and liquidity management.
Investment Catalysts
- Stronger-than-expected economic recovery could offset NIM compression.
- Positive investment sentiment and better-than-expected fee income growth from wealth management services.
- Organic growth from the bank’s operations in mainland China.
Valuation Analysis
HSB’s share price has risen 6% year-to-date but has underperformed the Hang Seng Index and Bank of China (Hong Kong) by 8-11 percentage points. Despite the bank’s April share buyback announcement, its valuation remains less attractive compared to domestic peers. The fair value estimate has been fine-tuned to HKD 114.00, with a forward price-to-book (P/B) multiple of 1.3x, reflecting a discount to its historical average.
