1H24 results slightly higher than our expectations

Bank of China Hong Kong announced 1H24 results: 1H24 revenue, profit before provision, and ordinary net profit to mother increased by 14.6%, 18.4%, and 17.9%, respectively; 2Q24 revenue and profit before provision increased by 12.4% and 15.3%, respectively. The performance was slightly higher than our expectations, mainly due to the good performance of net interest income.

The company achieved a ROE of 12.39% in 1H24, the first time since 2019 that ROE has returned to more than 12%.

Currently, the company trades at 0.7 times the 2024E net market ratio and the 2024E dividend rate of 8.0%. The valuation is still at a historically low level. We believe that the discount may be mainly due to market concerns about Hong Kong's economy and asset quality.

As the US interest rate cut cycle approaches, the recovery in macroeconomics and market sentiment in Hong Kong, China is expected to drive up the company's valuation.

Development trends

Net interest spreads performed well, and loans have remained generally stable since the beginning of the year. The 2Q24 company's adjusted net interest income increased 10.7% and 1.6%, respectively; the adjusted net interest spread was 1.62%, flat year over year, with a slight increase of 1 bps from month to month. At the end of 1H24, customer loan balances decreased by 0.2% compared to the beginning of the year, and customer deposit balances increased 5.8% from the beginning of the year. The growth in scale continued to outperform the market. Among them, BOCHK's RMB business grew rapidly, and RMB deposits and loans increased 17% and 32%, respectively.

Fee revenue improved moderately. 1H24's net handling fee revenue increased 1.8% year over year. Among them, investment and insurance business, credit business, and non-credit traditional business were +7.2%, -7.8%, and +6.9%, respectively.

The quality of commercial real estate exposure assets in Hong Kong, China is stable. The credit cost of 1H24 companies was 0.24%, up 10 bps year on year but fell sharply by 36 bps month-on-month, and the bad rate at the end of 1H24 was 1.06%, up a slight increase of 1 bps from the beginning of the year. At the end of 1H24, the company's commercial real estate loans were HK$351.6 billion, of which HK$89.6 billion was exposed to mainland Chinese real estate clients. The remaining HK$262 billion (accounting for about 15% of total loans) was mainly commercial real estate loans in Hong Kong, China, with a non-performing ratio of 0.16%, mortgages accounting for 29%, and an average LTV ratio of less than 45%. We believe that most of the company's customers are large local blue-chip companies. Currently, commercial real estate risks are relatively manageable.

The capital is in good condition, and we expect an increase in shareholder returns. At the end of 1H24, the company's core Tier 1 capital adequacy ratio was 20.0%, up 1.0ppt from the beginning of the year. The company's 1H24 dividend was HK$0.57 per share, with a dividend ratio of 30%. Although the dividend ratio decreased by 3ppt year on year, the dividend per share increased steadily. We believe that compared to the mid-term dividend payout ratio, the annual dividend payout ratio is more worthy of attention, and we are still optimistic that the company's dividend payout ratio will increase steadily throughout the year. Furthermore, considering that BOCHK has sufficient capital, we expect the company to make effective use of capital through dividends, repurchases, or foreign mergers and acquisitions in the future.

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, due to significant improvements in the company's ROE and easing of asset quality concerns, the target price was raised by 4.7% to HK$29.53, corresponding 0.9 times the 2024E net market ratio and 0.9 times the 2025E net market ratio. There is 24.9% upside compared to the current stock price.

risks

Hong Kong's economic performance fell short of expectations, and interest rates declined more than expected.