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Morningstar | Hang Seng Bank Reports Stellar 1H Result; FVE Increased to HKD 170

Narrow-moat-rated Hang Seng Bank reported a stellar first-half result with solid growth across both net interest income and fee income. However, with rising uncertainty on global trade and weaker investor sentiment likely in the medium term, we expect growth to moderate in the second half.

Our fair value is increased to HKD 170 as we increase our net interest margin, or NIM, assumption but we continue to see the bank as overvalued. While average Hibor was meaningfully higher in the first half, management noted the strong NIM benefited particularly from a spike in one-month Hibor to above 2% at the end of June. One-month Hibor has since moderated and combined with a shift from current and savings accounts to higher cost fixed income deposits, NIM in the second half may be lower than the first half, in our view. Still, we expect NIM to be higher than our previous assumption and we expect 2.05% for fiscal 2018 and to steadily increase thereafter.

An increased level of demand for borrowings in real estate development and investment, and the trade sectors underpinned a 6% increase in gross loans. This was largely in line with system growth in Hong Kong. With rising trade tensions, loan growth may moderate slightly in the second half of fiscal 2018. We adjust lower our loan growth slightly to 10% from 12% for fiscal 2018 and assume five-year average loan growth of 8.2%, compared with 8.6% previously. Similar for net fee income, we expect net fee income to moderate in the second half as investor sentiment is expected to weaken. Retail investment funds, securities brokerage, and credit facilities fees were particularly strong though management noted slower growth in investment sales in the second quarter. This is consistent with the bank's Singapore peers, which have all posted a decline in fee income for their wealth management divisions.

Asset quality slipped slightly but remains manageable. Impaired loans/total loans was 0.31% with allowance almost covering total impaired loans at 0.9 times. Capital position was strong with common equity Tier 1 ratio edging 30 basis points higher to 15.8%. Risk-weighted assets' intensity was slightly higher as overall lending increased, resulting in high credit risk-weighted assets.