20130830-DBS_Group-Bank_of_China_Hong_Kong_Parent_is_more_appealing_12页_259kb

Summary of DBS Group Research on Bank of China Hong Kong (BOCHK)

Core Content and Key Points

Overall Rating and Price Target

• Rating: BUY
• Price Target: HK$30.30 (12-month)
• Previous Target Price: HK$29.50
• Reason for Upgrade: Slight increase in forecasts and target price due to improved performance and potential catalysts such as the US interest rate cycle

Company Overview

• Industry: Financials
• Sector: Banks
• Principal Business: Offers a range of financial products and services to retail and corporate customers, and is one of the three banknote issuing banks in Hong Kong
• Parent Company: Bank of China (BOC), with a significant shareholding (66.1%)

Financial Performance (1H13)

• Net Profit: HK$11.25bn, slightly above forecast (1% increase)
• Core Net Profit: HK$11.079bn, up 7.6% YoY
• EPS (1H13): HK$1.05, slightly above the previous forecast (HK$1.98)
• Dividend Yield: 5.2% (1H13), with an interim DPS of HK$0.545
• ROE (1H13): 14.9%, indicating strong profitability
• ROA (1H13): 1.23%, showing modest asset efficiency
• NIM (1H13): 1.67%, reflecting stable net interest margins
• Credit Cost (bps): 9.2%, slightly increased from previous levels

Key Financial Metrics (FY Dec)

• Pre-prov. Profit: Expected to grow from HK$24,358m in 2012A to HK$33,225m in 2015F
• EPS: Projected to increase from HK$1.98 in 2013F to HK$2.50 in 2015F
• PE Ratio: Expected to decrease from 11.8 in 2013F to 9.8 in 2015F
• P/BV Ratio: Projected to decline from 1.6 in 2013F to 1.4 in 2015F
• Dividend Yield: Projected to increase from 5.2% in 2013F to 6.3% in 2015F
• ROAE: Expected to increase from 14.1% in 2013F to 15.2% in 2015F
• Capital Adequacy Ratio (CAR): Expected to decrease from 16.8% in 2013F to 16.0% in 2015F
• Tier 1 CAR: Expected to decline from 11.1% in 2013F to 10.9% in 2015F

Performance Analysis

• Net Interest Income Growth: Expected to decrease from 20.7% in FY06 to 8.4% in FY14
• Non-Interest Income Growth: Expected to increase from 25.7% in FY06 to 33.0% in FY14
• Fee Income Growth: Expected to increase from 25.4% in FY06 to 26.3% in FY13
• Cost-to-Income Ratio: Expected to decrease from 34.7% in FY06 to 28.5% in FY15
• Loan Growth: Expected to decrease from 19.1% in FY10 to 6% in FY15
• Deposit Growth: Expected to decrease from 21.6% in FY10 to 5.1% in FY15
• Loan-to-Deposit Ratio: Expected to increase from 66.2% in FY12 to 71.9% in FY15

Asset Quality

• Impaired Loan Ratio: Improved from 0.26% in 1H13 to 0.26% in 1H13 (stable)
• NPL Ratio: Improved from 0.26% in 1H13 to 0.26% in 1H13 (stable)
• NPL Provision Coverage: Increased from 180% in 2H12 to 194% in 1H13

Capital Adequacy

• Tier 1 CAR: Declined to 11.2% as of June 2013, similar to peers such as WHB and BEA
• Core CAR: Declined to 11.2% in 1H13, indicating a need for capital management

Dividend Discount Model

• Book Value per Share (CY13-18): Expected to increase from HK$15.1 to HK$21.2
• EPS Growth: Expected to increase from HK$2.07 to HK$3.25
• Total Value: Estimated at HK$30.3, based on present value of future earnings and terminal value assumptions
• Terminal Value (GGM): Estimated at HK$36.4, assuming a P/BV of 1.71 and COE of 10.0%

Peer Comparison

• Hang Seng (0011 HK): Hold rating, target price HK$125.5, upside 4.3%
• BOCHK (2388 HK): Buy rating, target price HK$30.3, upside 23.7%
• BEA (0023 HK): Hold rating, target price HK$30.5, upside 2.2%
• WHB (0302 HK): Buy rating, target price HK$93.3, upside 22.3%
• DSBG (2356 HK): Buy rating, target price HK$13.7, upside 23.6%
• Simple Average: P/BV of 1.8, ROE of 14.2%

Key Assumptions

• NIM: Expected to range from 1.32% to 1.75%
• Loan Growth: Expected to range from 14% to 6%
• Fee Growth: Expected to range from 11% to 8%
• Credit Cost: Expected to range from 0.05% to 0.11%
• Cost-to-Income Ratio: Expected to range from 34.7% to 28.5%
• Dividend Payout: Expected to remain around 62% for CY13 to CY15

Sensitivity Analysis

• NIM +/- 10bps: Net Profit +/- 7.7%
• Credit Cost +/- 10bps: Net Profit +/- 3.8%

Financial Stability Measures

• Loan-to-Deposit Ratio: Expected to increase from 66.2% in FY12 to 71.9% in FY15
• Net Loans / Total Assets: Expected to increase from 43.4% in FY12 to 49.3% in FY15
• Investment / Total Assets: Expected to decrease from 26.3% in FY12 to 24.0% in FY15
• Customer Deposits / Interest-bearing Liabilities: Expected to increase from 81.0% in FY12 to 87.4% in FY15
• Interbank Deposits / Interest-bearing Liabilities: Expected to decrease from 16.7% in FY12 to 10.2% in FY15

Conclusion

• Recommendation: Maintain BUY rating for BOCHK with a slightly increased price target and forecasts
• Preferred Alternative: Parent company BOC due to clearer near-term catalysts and lower P/BV ratio
• Catalysts: US interest rate cycle, offshore RMB income opportunities
• Key Risks: Pressure on profitability from funding costs and credit costs, sensitivity to property price changes

Key Takeaways

• BOCHK's performance has shown improvement in asset quality and core profit, though profitability is under pressure in the near term.
• Dividend yields are stable and attractive, with a focus on long-term re-rating potential.
• Parent company BOC is preferred due to better catalysts and lower valuation.
• Sensitivity analysis shows that changes in NIM and credit cost significantly impact net profit.
• Peer comparison indicates that BOCHK is a strong performer, though not the only one with positive outlooks.