Morningstar | Higher Net Interest Income Underpins Hang Seng Bank's 2H Result. See Updated Analyst Note from 19 Feb 2019
Hang Seng Bank posted a solid fiscal 2018 result ahead of our expectations. The key positive was stronger than expected loan growth and improvement in net interest margins, or NIMs, propelling full-year net interest income higher by 22%. Full-year NIMs of 2.18% were ahead of 2.1% in the first half, attributable to sharply higher interbank rates. As previously noted, interbank rates have declined in early 2019 but remain ahead of the first half of 2018. We continue to expect NIMs to increase in 2019 and 2020 but at a more tepid pace. As expected, net fee income was weak as a sharp decline in the Hang Seng Index resulted in a material decline in brokerage revenue and sales of retail investment funds. Historically, both sources of revenue contribute to an average of 40% on total fee income. With the Hang Seng Index recovering in the first two months of 2019, we expect a recovery in fee income in the first half of 2019.Our fair value estimate is increased to HKD 185 from HKD 170 as we factor in the higher than expected NIM and the time value of money.
As previously noted, credit cost was extraordinarily low in the first half given the favourable interest rate environment and economic conditions remained resilient, resulting in a low level of nonperforming loans. As expected, second half expected credit loss was double the first half but remains low compared with historical levels. This was attributable to the addition of a more severe downside scenario in assessing the bank’s loan portfolio. Management noted prudence in its assumption considering a higher level of economic uncertainty. Asset quality remains strong despite a slight uptick in credit impaired loans in the second half. Impaired loans make up 17 basis points of total loans outstanding. The bank’s balance sheet remains solid with the common equity Tier 1 ratio at 16.6% and capital adequacy ratio at 20.2%.
Hang Seng Bank and its subsidiaries are engaged in the provision of banking and related financial services. Hong Kong and other businesses segment include: Retail Banking and Wealth Management; Commercial Banking activities; Global Banking and Markets; and Other. Co.'s Mainland China business segment comprised of the business of Hang Seng Bank (China) Limited and Co.'s share of profits from mainland associates. As of Dec 31 2014, Co. had total assets of HK$1,263,990,000,000.
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