1Q24 results are basically in line with our expectations

BOCHK released the 1Q24 performance report. Revenue increased 16.8% year on year, profit before provision increased 21.5% year on year, and operating profit increased 16.8% year on year. It basically met our expectations. BOCHK currently trades at a net market ratio of 0.7 x 2024E, which is a record low. We expect 2024E's net profit to mother to increase 15.1% year-on-year, mainly due to increased non-interest income and falling credit costs. If Hong Kong's economic expectations and Hong Kong stock sentiment improve, we believe that the company's stock price may have good elasticity.

Development trends

The net interest spread performance fell slightly short of expectations. BOCHK 1Q24 adjusted net interest income was +20.5% and -4.7% month-on-month respectively, and adjusted net interest spreads were +11bps and -7bp to 1.61% month-on-month. We believe that the main reasons for the month-on-month decline in the company's net interest spread are: 1) the average 1Q24 1M HIBOR fell 55 bps from quarter to quarter, leading to a decline in asset-side returns; 2) the company's share of CASA deposits fell 3.2ppt to 44.2% month-on-month, and debt costs increased.

Growth in scale continues to outperform the market. At the end of 1Q24, the company's total assets, customer loans, and customer deposits increased by 0.9%, 1.7%, and 2.4% respectively from the beginning of the year. The scale growth performance was superior to the overall level of the banking industry (Hong Kong banking sector loans and deposits at the end of February were -1.8% and +0.6% compared to the beginning of the year, respectively). We believe the company is expected to achieve positive loan growth throughout the year and continue to outperform the market.

The overall handling fee business picked up, and the non-interest revenue performance was better than expected. The 1Q24 company's adjusted non-interest revenue increased 3.9% year over year, with net handling fee revenue up 1.5% year on year and other non-interest income up 10.8% year on year. In the company's 1Q24 handling fee business, loan commissions, insurance, fund sales, foreign exchange, credit card, and escrow businesses all achieved year-on-year growth. Only the securities brokerage business declined year-on-year due to poor market sentiment.

We believe that the company's non-interest revenue performance has been impressive this season. Hong Kong stock performance has recently recovered, and we expect the growth rate of the company's net handling fee revenue for the whole year to correct.

The provision plan is in line with expectations, and credit costs are expected to fall year-on-year throughout the year. The company's provision for 1Q24 was HK$883 million, up from HK$293 million in the same period last year, but fell sharply from HK$3,653 million in 4Q23. We believe that the provision for 1Q24 is mainly due to the downgrading of the company's internal ratings by some customers. For the whole year, we believe that the company's previous provision for exposure to public real estate in mainland China was relatively sufficient, with a provision coverage rate of 70.1%, so credit costs are expected to drop significantly year-on-year.

Profit forecasting and valuation

Keep profit forecasts unchanged. The current stock price corresponds to 0.7 times the 2024E net market ratio and 0.7 times the 2025E net market ratio. Maintaining an outperforming industry rating, we raised the target price by 9.3% to HK$28.2, corresponding 0.9 times the 2024E net market ratio and 0.8 times the 2025E net market ratio, as we believe that easing market concerns about the quality of the company's real estate-related assets will help support its valuation recovery.

risks

The decline in net interest spreads exceeded expectations, and real estate exposure risk exposure exceeded expectations.