The scale is steadily expanding, and the profit growth rate is increasing
23H1 net profit, total operating income, and PPP were +32.9%, +21.6%, and +28.2% compared to +16.1 pct, +5.4 pct, and +8.2 pct for the full year of '22. The increase in revenue was mainly due to an increase in net interest income and an increase in insurance service performance. 2023H1's ROE and ROA were +2.44pct and +0.26pct to 10.81% and 0.97%, respectively, year-on-year. Given the steady expansion of scale, we predict that the Bank of China Hong Kong's BVPS forecast values for 2023-25 will be HK$30.64, 32.42, and 34.22, respectively, and the corresponding PB will be 0.71, 0.67, and 0.63 times, respectively. Comparable, listed banks, Wind unanimously predicted an average PB of 0.81 times (8/30) in 2023. We believe that the company's strategy is advancing in depth and should enjoy a certain valuation premium. We gave the 2023 target PB 1.00 times, the target price is HK$30.64, and the “buy” rating is maintained.
Scale expansion is accelerating, and asset pricing is rising
Total assets, loans, and deposits were +4.1%, +2.3%, and -9.3% in the first half of the year, and the growth rate was +2.9 pct, -0.9 pct, and -4.9 pct compared to the full year of '22. Of the new loans added in 23H1, loans to the public and retail sectors accounted for 41% and 59%, respectively. The adjusted net interest spread for the first half of the year was 3bp to 1.56% compared to 2022. The interest spread trend was relatively stable, driving net interest income +52% year-on-year. The yield on interest-bearing assets and loan yields for the first half of the year were 3.58% and 4.31%, respectively, compared to +88 bps and +104 bps in 2022. The interest-bearing debt cost ratio and deposit cost ratio for the first half of the year were 2.53% and 2.61%, compared to +111 bps and +117 bps in 2022. The increase in deposit costs was mainly affected by deposit regularization, with end-of-June savings accounts for -1.3 pct compared to the end of March.
Non-interest income fluctuates, and the cost-to-revenue ratio declines
23H1 non-interest income was -23.9% year-on-year, compared to -30.3pct for the full year of '22. The decline in the growth rate of non-interest income was mainly affected by fluctuations in net transactional income, net service fees, and commission income. 23H1's net transactional revenue, net service fees and commission revenue were -54.6% and -9.5%, respectively, and insurance service performance was +12.6% year-on-year.
The decline in net transactional income was mainly due to the company's optimization of the bank's investment market structure, and the corresponding reduction in market pricing fluctuations for a number of interest rate instrument combinations caused by changes in market interest rates. The decline in net service fees and commission revenue was mainly due to weak investment market conditions, and a year-on-year decline in securities brokerage business revenue. 23H1 cost to revenue ratio was -3.8 pct to 25.5% year on year, and cost control capabilities were improving.
Asset quality is stable and credit costs are declining
At the end of June, the company's non-performing loan ratio was +23 bps and +20 bps to 0.73% compared to the end of March and the end of '22, respectively, which is still at a low level in the market. At the end of June, loans from mainland real estate companies accounted for 5.4% of customer loans, accounting for -0.7 pct compared to the end of '22. According to the “third-tier red line”, loans to green-tier customers accounted for 75%. The credit card loan delinquency rate and personal housing loan delinquency rate at the end of June were all -0.01 pct compared to the end of the 22nd. 23H1 customer credit costs were -0.07 pct to 0.14% year over year, driving profit release. At the end of June, the company's capital adequacy ratio and core Tier 1 capital adequacy ratio were +1.47 pct and +1.49 pct respectively compared to the end of '22, respectively, consolidating capital levels.
Risk warning: Economic recovery fell short of expectations, and the deterioration in asset quality exceeded expectations.