EUR 850.00 For Business Accounts Only

Morningstar | BOC Hong Kong Posts Solid Fiscal 2018 Result; Banks Remain Undervalued. See Updated Analyst Note from 31 Mar 2019

BOC Hong Kong wrapped up earnings for the Hong Kong banks with a result in line with our expectation. For the full year, net profit attributable to equityholders was up 12% to HKD 32 billion, largely in line with our forecast. Trends in the second half were consistent with the rest of its peers, with the clear positive the stronger net interest margin, or NIM.

Our fair value is maintained at HKD 39.20, representing a fair price/book ratio of 1.7 times. We forecast return on equity averaging 13% over our explicit forecast period and we continue to believe the bank is undervalued. The bank’s Southeast Asia entities offer a point of differentiation to local peers, and we expect the assets to underpin higher than peer and system growth in Hong Kong over the medium term. The main concern is the rising risk profile with its exposure to emerging markets, but the credit quality of the Southeast Asia entities improved. Nonperforming loans specific to Southeast Asia declined by 4 basis points to 1.14% of total loans. While this may reflect the transfer of the bank’s historic, prudent underwriting track record to its new entities, we believe it is still early to tell and a full business cycle is needed to alleviate concerns. Our forecasts have factored in steady increases in overall credit cost. The bank’s capital position remains strong with common equity Tier 1 ratio increasing to 17.48% from 16.52% for the full year.

The improvement in NIM in the second half mainly came in the third quarter on higher interbank rates in Hong Kong. For the full year, NIM was 5 basis point higher at 1.62%. Management guided for flat NIM for fiscal 2019 with U.S interest rates likely remaining on hold. However, a decline in system liquidity has seen interbank rates increase over the past three months, tracking higher than the same period last year and in line with the fourth quarter. With the bank’s loan portfolio continuing to be progressively repriced, management guidance may be conservative and we maintain our assumption of a slight increase in NIM. For the medium term, our NIM is adjusted lower on the expectation U.S. interest rates will likely increase once in 2020, as per our house view. On the deposit side, the bank grew deposits by 6.6% across both retail and corporate segments and we estimate its deposit market share to be largely steady. Likewise, the proportion of low-cost current and savings account balances was steady, close to 55% of total deposits. We expect the bank to maintain its funding advantage in Hong Kong and our narrow economic moat rating is unchanged.