EUR 850.00 For Business Accounts Only

Morningstar | Hang Seng Bank FVE Unchanged; Stock Remains Slightly Overvalued. See Updated Analyst Note from 13 Dec 2018

There is little read-through from Bank of East Asia’s preclose meeting for narrow-moat-rated Hang Seng Bank. As highlighted in our Dec. 12 Bank of East Asia note, loan growth in Hong Kong remains resilient, though it slowed in the third quarter. Year-to-October loans for use in Hong Kong grew at an annualised 5.5% with system loan growth at a slower 4.8%, weighed by trade-related loans. We have adjusted our loan growth forecast slightly lower in line with slower system loan growth but continue to assume high-single-digit growth for the full year. Our fair value of HKD 170 for Hang Seng Bank is unchanged, and after an 18% decline in the share price from its recent high of HKD 216, the bank is only slightly overvalued.

With a sizable deposit base and a larger proportion deriving from current and savings accounts, or CASA, we expect Hang Seng Bank’s net interest margin to be stronger for the full year. In line with the system, there was a migration of CASA deposits to higher-interest fixed deposits for Hang Seng Bank in the first half. The overall CASA contribution to total deposits declined to 72% from 79% as depositors were attracted to the latter’s higher rates. We expect funding cost pressure to be offset by higher asset yields. Interbank rates have maintained their positive trajectory, and an adjustment to the prime rate in August should flow through to higher asset yields. We continue to assume a steady increase in net interest margin over the medium term.

Both Bank of East Asia and BOCHK noted an adjustment to model assumptions resulting in higher credit costs. We expect credit costs to increase for Hang Seng Bank but remain at a benign level. With interest rates remaining low and economic conditions still resilient, we expect a low level of nonperforming loans to persist for the full year, but our forecasts assume a steady increase over the medium term. The bank continues to conservatively hold excess capital with common equity Tier 1 at 15.8%, and we expect this to increase on rising profitability. A countercyclical buffer of 2.5% will apply as of Jan. 1, 2019, from the current level of 1.875%.