1H24 results slightly higher than our expectations
Hang Seng Bank announced 1H24 results: revenue of HK$20.431 billion (-0.4% compared to our expectations), up 2.5% year over year; net profit to mother of HK$9.611 billion, up 0.7% year over year (+9.0% compared to our expectations).
The company's net profit to mother was higher than our expectations mainly due to lower credit costs, but the company's non-performing ratio at the end of 1H24 increased significantly due to exposure to commercial real estate risks in Hong Kong, and the market is concerned about the subsequent evolution of its asset quality.
Development trends
The month-on-month decline in net interest spreads was higher than we expected. Hang Seng 1H24's net interest income fell 9.5% month-on-month to HK$15.483 billion, and net interest spread fell 22bp to 2.29% month-on-month. We believe it was mainly due to lower HIBOR and deposit competition. At the end of 1H24, Hang Seng CASA deposits fell 2ppt to 51% month-on-month. At the results meeting, the company indicated that the 2024E net interest spread may be slightly lower than last year. Considering the 2.30% net interest spread for the full year of last year, this means that the 2H24E net interest spread is expected to remain relatively stable.
The non-performing rate of commercial real estate in Hong Kong increased, and the company said collateral was sufficient. Hang Seng's non-performing rate at the end of 1H24 rose 2.49ppt to 5.32% month-on-month, mainly due to pressure on the cash flow of Hong Kong commercial real estate customers:
At the end of 1H24, Hang Seng Hong Kong's commercial real estate exposure was HK$140 billion (accounting for 16% of total loans), 2/3 of which were secured and 1/3 unsecured. Relatively speaking, the current market focus is mainly on the secured part, because most of the unsecured customers are large enterprises, and the cash flow situation is good.
At the end of 1H24, Hong Kong's commercial real estate had a total of HK$11.9 billion and a poor HK$13.5 billion, but the company said the two types of collateral were sufficient, with average LTV below 50% and 60% respectively. As a result, the company's 1H24 provision was only HK$1.512 billion (lower than our expectations of HK$2.689 billion), which was a significant year-on-year decline. According to the company's results conference, the coverage rate of non-performing loans with commercial real estate provisions plus collateral value in Hong Kong is over 100%.
The company maintained that the 2024E annual provision was lower than last year's guideline.
The capital adequacy ratio was weaker than we expected. At the end of 1H24, Hang Seng's Core Tier 1 Capital (CET1) adequacy ratio was 16.6%, down 1.5ppt month-on-month, mainly due to RWA growth due to weakening shareholder returns and asset quality. At the results meeting, the company stated that after this round of HK$3 billion share repurchases, it would consider various methods for subsequent shareholder returns, but it was not clear that it would continue to repurchase. Since the company often targets the Hong Kong banking industry's CET1 adequacy ratio (17.4% at the end of 1Q24) to arrange capital allocation, we are cautious about the company's continued future repurchases in the context where asset quality is still uncertain.
Profit forecasting and valuation
Keep profit forecasts largely unchanged. The current stock price corresponds to 1.1 times the 2024E net market ratio and 1.1 times the 2025E net market ratio. The neutral rating and target price of HK$104.2 remain unchanged, corresponding to 1.3 times the 2024E net market ratio and 1.2 times the 2025E net market ratio, with 12.8% upside compared to the current stock price.
risks
Interest rate cuts have exceeded expectations, and real estate exposure risks continue to be exposed.