Positioned for higher capital return; Buy BOC(HK)
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Deutsche Bank AG/Hong Kong
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should
be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should
consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST
CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 072/04/2012.
Sophia Lee, CFA
Research Analyst
(+852) 2203 6226
sophia.lee@db.com
Tracy Yu
Research Analyst
(+852) 2203 6191
tracy.yu@db.com
Top picks
BOC Hong Kong Holdings
(2388.HK),HKD24.95
Buy
Dah Sing Financial (0440.HK),HKD36.65 Buy
Dah Sing Banking (2356.HK),HKD9.03 Buy
Companies Featured
Hang Seng Bank (0011.HK),HKD119.40 Hold
2011A 2012E 2013E
P/E (x) 13.1 13.2 9.7
Div yield (%) 4.5 4.4 4.4
Price/book (x) 2.2 2.6 2.2
Bank of East Asia Ltd (0023.HK),HKD30.95 Hold
2011A 2012E 2013E
P/E (x) 15.6 13.7 15.6
Div yield (%) 3.1 3.0 3.1
Price/book (x) 1.3 1.3 1.2
Wing Hang Bank (0302.HK),HKD80.00 Hold
2011A 2012E 2013E
P/E (x) 11.6 12.6 12.6
Div yield (%) 2.2 2.1 2.4
Price/book (x) 1.1 1.3 1.2
Related recent research Date
BOC(HK): Increasing DPS for
forecast years; Buy reiterated
Sophia Lee
14 Jan 2013
BOC(HK): Dividend increase
could be next positive catalyst for
a re-rating
Sophia Lee
21 Nov 2012
Hong Kong Banks: Capital
inflows & HKMA intervention net
positive for small banks
Sophia Lee
07 Nov 2012
Hong Kong banks: Mortgage
affordability looks increasingly
stretched
Sophia Lee
15 Oct 2012
2012 was a strong year for Hong Kong banks, with share prices of banks under
our coverage rising by an average 33%. We believe 2013 will be a year of
capital return, as we expect dividends to increase in light of an accommodative
regulatory environment, decelerating RWA growth, and strong capital positions
(system CAR of 16%). Banks do need to think about capital deployment, and in
the absence of major investment plans, dividends are likely to increase. We
rate BOC(HK), DSFH and DSBG as Buy in the sector, and HSB, BEA and WHB
as Hold.
Why Hong Kong banks will pay more dividends this year
Hong Kong banks’ CAR of 16% is understated, given the current benign credit
cycle and HKMA capital rules, which are strict relative to other regions. Along
with a loan growth forecast of only 6% in 2013 and more accommodative
Basel 3 rules than initially drafted, we believe banks are well positioned to
deliver higher capital returns to shareholders via higher dividends. For
deploying capital, we do not believe banks will opt for investments, as Hong
Kong banks are close to achieving their target network in mainland China, and
the Basel 3 environment is not conducive to investment in financial entities.
2013 key sector assumptions: loan and deposit growth of 6%
For 2013, we forecast (1) system loan growth to slow to 6% (vs. 8% for 2012),
mainly due to slower mortgages and overseas loans, (2) system deposit
growth of 6% as capital inflows are offset by lower savings; in fact, the current
account rose to the historical high level (13% of system deposits) while time
deposits fell to the lowest in a decade (45%), (3) average NIM improvement of
5bps to 1.65% based on stable funding cost and better asset yield, particularly
RMB margins, though risk is on the downside since mortgage pricing
competition may return, (4) benign credit cost, with a slight YoY increase to an
average of 12bps, and (5) flat non-interest income growth, though a strongerthan-
expected risk appetite would be a risk to the upside.
Key risks to the sector: mortgage pricing, unexpected rate increase, property
We believe the risk of mortgage pricing competition is rising due to increasing
system liquidity from capital inflows, but property transaction volumes have
been low in the wake of additional prudential measures. If this competition
intensifies, it should be negative for margin outlook. Another key risk is Hong
Kong property. We believe affordability is increasingly stretched, and the
market has underestimated the risk from interest rate hikes. The changed
wording of the FOMC minutes may mean that the US rate may be increased
earlier than expected, triggering a sell-off. This would result in property
revaluation losses and lower book values. In 2011, property revaluation gains
contributed to 8.7% of 2011 pre-tax income and accounted for 11.7% of 1H12
banks’ book values.
Sector trading at 1.3x FY13E P/B; maintaining neutral view on sector
Hong Kong banks under our coverage are trading at 11.2x FY13E P/E and 1.3x
FY13E P/B. We value banks using the Gordon Growth Model (P/B=ROE-g/COEg).
Key sector downside risks are a severe correction in HK property prices and
renewed mortgage pricing competition. Key upside risk is better-than-expected
investment appetite, which should aid non-interest income growth.