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DBS Group Research Summary: Equity (1 April 2014)

Core Content

This report discusses the performance and outlook for Hong Kong banks in the context of macroeconomic factors and sector-specific dynamics. The key focus areas include earnings, capital and dividends, loan-to-deposit ratios (LDR), and the potential for future growth. The report also compares Hong Kong banks with those in other regions such as Singapore, Malaysia, and Indonesia, and provides insights on valuation metrics and share price performance.

Main Points

Earnings and Performance

• 2013 Earnings: The sector's 2H13 earnings were better than forecast, with four of five banks beating consensus.
• NIM Expansion: The net interest margin (NIM) expanded by 7 basis points (bps) on average in 2H13 due to higher money market rates in China and lower funding cost pressure.
• ROE Growth: The pre-provision profit margin (PPOP) expanded by 25% y-o-y in 2H13, contributing to a strong ROE outlook.
• Asset Quality: No significant increase in non-performing loans (NPL) was observed in 2H13, indicating stable asset quality.

Loan and Deposit Trends

• LDR Pressure: The overall LDR reached 74%, the highest since 2000, driven by rapid loan growth.
• HK$ LDR: The HK$ LDR remained flat due to an increase in HK$ deposit mix.
• Loan Growth: Loans for use in Hong Kong rose by 4.1% m-o-m and 18% y-o-y, while deposit growth was 10.6% y-o-y.
• Loan Segments: Corporate loans and retail loans both showed growth, with specific segments like IT and property development experiencing significant increases.

Capital and Dividends

• Disappointing Capital and Dividends: Some banks, particularly BOCHK and DSBG, had disappointing capital and dividend payouts.
• Downgrade and Trim: BOCHK was downgraded to HOLD due to low dividend payout ratios and leverage issues. DSBG's target price was trimmed due to potential EPS dilution from a rights issue.

Sector Outlook

• Neutral View: The sector is viewed as neutral for 1H14 due to high LDR and QE tapering limiting NIM and ROE improvement.
• ROE Potential: ROE enhancement from US interest rate hikes is expected to be significant in the future.
• M&A and Sentiment: M&A excitement is waning, and the sector is likely to be "cocooned" for much of 2014.

Preferred Banks

• Hang Seng Bank (11.HK): Recommended as a BUY. It has a stable funding base and resilient NIM. Dividend payout potential exists if it disposes of its Industrial Bank stake.
• Dah Sing Banking Group (2356.HK): Recommended as a BUY. It is trading below book value and has potential for re-rating in a higher interest rate environment.

Valuation Analysis

• Valuation Metrics:
  • P/BV: HSB is at 2.54x, DSBG is at 1.06x.
  • Dividend Yield: HSB offers a higher dividend yield (16.1%) compared to peers.
  • EPS CAGR: HSB has a higher EPS CAGR (13.1%) than others.
  • ROE: HSB has a higher ROE (3.5%) than the sector average.

Share Price Performance

• Performance vs. HSI:
  • HSB had a 1.9% gain relative to HSI in 1 month.
  • DSBG had a 25% upside potential.
  • WHB had a 1.9x P/BV ratio and showed strong performance.
  • BEA and BOCHK had lower performance relative to HSI in 2013.

Key Macroeconomic Indicators

• GDP and CPI: Hong Kong's GDP and CPI trends are closely monitored for economic health.
• US and Fed Indicators: US CPI, housing starts, and employment data are analyzed for potential rate hikes and their impact on Hong Kong banks.

Summary of Key Performance Indicators from HKMA

• NIM: Local and foreign retail banks showed an average NIM expansion.
• Cost Income Ratio: The cost income ratio was a key factor in profitability.
• LDR and Bad Debt Charge: LDR reached a high level, while bad debt charge to average total assets remained stable.
• Capital Adequacy Ratio: Capital adequacy ratio was a concern for some banks.

Conclusion

Hong Kong banks are facing challenges with high LDR and the impact of QE tapering, which limits near-term NIM and ROE improvement. However, there is potential for re-rating as US interest rate hikes become more imminent. The report recommends a neutral stance for the sector, with a preference for HSB and DSBG due to their strong fundamentals and potential for future growth.