2H23 results slightly higher than our expectations
Hang Seng Bank announced 2H23 results: revenue, profit before provision, and net profit to mother increased by 10%, 12%, and 42% year-on-year respectively, and increased 19%, 27%, and 62% year-on-year for the full year of 2023. The results were slightly better than our expectations, mainly due to net interest spreads, operating expenses, and credit costs being better than expected.
Development trends
Net interest spreads performed better than we expected. Hang Seng Bank's net interest spread in 2023 was 2.30%, up 55 bps year over year, with 1H23 and 2H23 net interest spreads of 2.09% and 2.51% respectively. The company's customer loans and customer deposits changed by -4% and 0% month-on-month respectively at the end of 2H23. The continued decline in loan size reflected poor local credit demand and the public company's continued pressure on real estate exposure in mainland China. Company deposits remained basically stable, not as sharp as 1H23, but the share of CASA deposits fell 8ppt to 53% month-on-month at the end of 2H23.
Non-interest income remains weak, and expenses are well controlled. 2H23's handling fee revenue fell 9% year on year, resulting in non-interest income falling short of our expectations. 2H23 operating expenses increased 7% year over year, better than we expected.
Credit costs peaked and fell, and mainland China's real estate exposure continued to drop. Hang Seng Bank made provisions of HK$4.3 billion and HK$6.3 billion for 2H23 and the full year of 2023, respectively. The year-on-year decrease was 23% and 19%, and credit costs were 0.96% and 0.69%. The performance was better than our expectations.
At the end of 2023, mainland China's exposure to public real estate totaled HK$34.7 billion (accounting for about 4% of total loans), down 15% from the end of 1H23, and 51% from the cumulative pressure at the end of 2021. Among them, bad and concern exposures were HK$14.4 billion and HK$4.9 billion respectively, with provisions for the two types of exposure calculated respectively. At the end of 2023, Hang Seng's loan ratio for public real estate exposure in mainland China was 21%, and collateral exposure was about 53%. Together, the two could cover 74% of exposure (60% at the end of the previous year), while the exposure coverage rate for private housing enterprises reached 85%, and the bad exposure coverage rate reached 88%.
Regarding the risk in the local market in Hong Kong, China, the company's performance conference indicated that commercial real estate assets were of stable quality, while most SME loans were fully collateralized and did not cause significant impairment losses.
The capital is in good condition. At the end of 2023, the company's core level 1 (CET1) capital adequacy ratio was 18.1%, an increase of 3ppt over the previous year. In 2023, the company paid a dividend of HK$6.50 per share, corresponding to a dividend ratio of 73%.
Profit forecasting and valuation
The 2024E profit forecast remains largely unchanged, and we have introduced the 2025E profit forecast of HK$17.431 billion. The current stock price corresponds to 1.1 times the 2024E net market ratio and 1.0 times the 2025E net market ratio. The neutral rating and target price of HK$92.10 remain unchanged, corresponding to 1.1 times the 2024E net market ratio and 1.1 times the 2025E net market ratio, with 3.1% upside compared to the current stock price.
risks
Market interest rates fell more than expected, and real estate exposure risks in mainland China continued to be exposed.