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Morningstar | BOC Hong Kong’s High-Level 1Q Update a Positive

Narrow-moat BOC Hong Kong, or BOCHK’s, high-level first-quarter update was positive, recovering from a weaker second half. The recovery was expected as trade uncertainty eased and an improvement in capital markets will benefit wealth management and brokerage income, underpinning net fee and commission income growth for BOCHK. Net trading income was also higher while credit quality remains strong, given the still resilient economic conditions. BOCHK noted impaired loans was 0.18% of total loans, largely steady at the end of last year. As such, operating profit before impaired allowance was 4.9% higher compared with the same period last year and 22% higher against the fourth quarter. The above trends were largely in line with peer DBS Group’s first-quarter result yesterday and we expect all banks to report similar trends in the first quarter.

Our fair value of HKD 39.20 is unchanged and the bank’s share price increased close to 25% off its lows in early January as concern over trade and its exposure to Southeast Asia alleviated. Some value remains with the bank trading at a 10% discount to our fair value estimate, but we require a larger margin of safety against the bank’s high uncertainty rating and our 3-star rating is reaffirmed. Our thesis for the bank is unchanged and we continue to see its exposure to Southeast Asia a differentiation to peers in Hong Kong.

Interbank rates in Hong Kong weakened slightly in the first quarter, compared with the fourth quarter of last year. This has resulted in narrower spreads and margins in the first quarter. However, interbank rates remained above the same period last year and as such, net interest margin, or NIM, was up 17 basis points against same period last year to 1.67%. We continue to expect NIM to improve in fiscal 2019 as current level of interbank rates are still materially higher than the first half of last year and we expect repricing of its loan book to continue to flow through. As previously noted, an expansion of NIM will moderate in the medium term as U.S. interest rates are likely to steady. A decline in interbank balance may lead to tighter liquidity for banks without sizable deposit, leading to a higher competition on deposits and rising funding cost. However, we believe BOCHK will fare well with the second-largest deposit market share in Hong Kong.