EUR 850.00 For Business Accounts Only

Morningstar | BOCHK Posts Solid 1H Result on Higher Net Interest Margin and Strong Loan Growth. See Updated Analyst Note from 28 Aug 2018

Higher net interest margin, strong loan growth and lower than expected provisioning underpinned Bank of China Hong Kong, or BOCHK's solid first-half result. We maintain our view the narrow-moat-rated BOCHK will remain dominant in its core market in Hong Kong, with its recently acquired southeast Asia operation delivering higher-than-peer growth for the bank. This provides a point differentiation for BOCHK against local peers as it is able to better serve Chinese corporate expansion in the region. However, this is reflected in its current share price and the bank is trading close to our unchanged fair value of HKD 39.20. Loan growth was up 6.6% against last year and again was above system growth of 5.3% over the same period. While annualised loan growth is slightly ahead of our forecast of 12%, second-half loan growth may decelerate slightly as concerns over trade weighs on business confidence. Similarly, for net fee and commission income, we expect more moderate growth in the second half of fiscal 2018 as the increase was driven by securities brokerage. Again, concern over global trade and the eventual implementation of tariffs saw turnover in the domestic equity market soften last quarter and in July and August.

The strong loan growth, combined with improving margins, lifted net interest income by 7.3%. Including the impact of currency swaps, net interest margin was up 10 basis points. This was underpinned by higher interbank rates and better loan spreads. Funding costs at the system level in Hong Kong have picked up since our last update in April. Composite interest rate--weighted average interest rate on deposits and wholesale funding--increased to 63 basis points in July from 38 basis point in March. The interbank rates in Hong Kong maintained its upward trajectory in the second quarter with average one-month Hibor in July at 1.81%, compared with 0.79% at the end of March.

We believe rising funding cost will benefit the top four banks in Hong Kong with sizable deposits, as competitors more reliant on wholesale funding will be unable to source cheaper. The increasing funding cost will see less pressure on lending spreads, as is the case over the last few years as lenders focused on higher-quality corporates. Still, liabilities yield should head north as depositors switch from savings deposit into time deposits, on higher fixed rates. Year-to-June savings deposit balance on a system level declined by 4.6% while time deposit increased 7.2% in the same period. BOCHK's current and savings account balance as a percentage of its deposit base slipped to 57%, from 63% but the former is marginally higher against smaller peers. We maintain our net interest margin assumption and expect steady increase in our explicit forecast period.

Asset quality was strong with provisioning benefiting from improving credit quality for a number of customers and a change in model assumptions. Overall credit cost was low at HKD 342 million, or 3 basis point of total loans. Total provision is prudent at 40 basis points of total loans and fully covers impaired loans outstanding. The introduction of IFRS 9 made previous period incomparable.