The worst has been priced in, indicating that the current valuation is considered undemanding even under the most pessimistic scenarios.
A potential US sanctions penalty of USD1b is expected in 2015 due to dealings with Iran, including accounts of Iranian entities and revenue from Iran-connected companies.
Credit cost forecasts are raised to 1.44-1.64% for 2015-16 due to concerns over non-oil & gas commodity finance.
The CET1 CAR is projected to drop to 11% by end-Dec 2016, requiring an equity capital replenishment of approximately USD1.2b to revive to 12%.
The EPS and ROE dilution is estimated at 6% and 0.2ppt, respectively, based on a gross return of 2.8% and a rights issue price of HKD51.50.
Valuation and Forecast
Metric
FY13A
FY14A
FY15E
FY16E
FY17E
Operating Income (USDm)
18,777.0
18,333.5
16,775.2
17,065.0
18,279.5
Pre-provision profit (USDm)
8,584.0
7,288.5
5,141.5
6,532.7
7,851.1
Core net profit (USDm)
5,018.0
2,511.5
236.8
1,825.4
4,329.5
Core EPS (USD)
2.1
1.0
0.1
0.7
1.8
Core EPS growth (%)
3.6
(50.6)
(90.6)
670.9
137.2
Net DPS (USD)
0.9
0.8
0.1
0.3
0.8
Core P/E (x)
4.6
9.4
100.3
13.0
5.5
P/BV (x)
0.5
0.5
0.5
0.5
0.5
Net dividend yield (%)
8.9
8.8
1.5
3.5
8.2
Book value (USD)
19.05
18.77
18.72
19.13
20.09
ROAE (%)
11.0
5.4
0.5
3.9
8.9
ROAA (%)
0.8
0.4
0.0
0.3
0.6
Key Risks and Assumptions
The target price was reduced from HKD120 to HKD88.60, based on a fair P/BV of 0.6x for FY16.
The long-term ROE assumption was lowered from 8.75% to 6% in the Gordon Growth Model (GGM) to account for potential equity capital replenishment.
Net profit forecasts were cut by 89.7% and 44.7% for FY15 and FY16, respectively, due to higher credit costs and regulatory penalties.
Core ROE is expected to rebound to 8.9% in 2017 with gradual recovery in total revenue and ongoing cost savings.
Rating Upgrade: The rating has been upgraded from HOLD to BUY due to the current valuation being undemanding and potential recovery in revenue and earnings.
Sanctions Risk: The potential for another USD1b sanction fine in 2015 due to dealings with Iran has been factored into the financial forecasts.
Credit Cost Increase: Credit cost forecasts for non-oil & gas commodity finance have been raised to 10-11% for 2015-16.
Equity Capital Needs: SCB may need to replenish equity capital of approximately USD1.2b to restore CET1 CAR to 12%.
Valuation Adjustments: The target price has been reduced to HKD88.60 based on a fair P/BV of 0.6x for FY16, lower than the historical trough P/BV of 0.78x.
Key Risks
Currency and Economic Conditions: Changes in currency values and economic conditions in emerging markets could impact performance.
Asset Quality Deterioration: Further deterioration in the asset quality of commodity finance could affect net profit and EPS forecasts.
