A mixed 4Q21 results with positive guidance
• In-line pre-provision operating profit
• Solid capital position
• A set of positive guidance
In-line 4Q21 pre-provision operating profit (PPOP) – 4Q21 result was mixed with underlying profit before tax USD139m was lower than consensus estimate of USD541m. 2H21 DPS of US9cents was declared, lower than expected. The miss was mainly due to ~USD100mn weaker income and a larger-than expected provisions (largely on ~USD300mn impairment of investment in China Bohai Bank), which were partially offset by lower costs. Income was 3% lower than consensus estimate which was mainly on non-interest income. That said, income was still up 3% y/y in 4Q21 with key drivers from wealth management (+5% y/y) and trade income (+14% y/y). Net interest margin (NIM) was up 3bps q/q on higher HIBOR in 4Q21. With costs came in 3% lower than consensus estimate, 4Q21 PPOP came in-line with expectation. Loan impairment charges came in ~USD200mn vs. consensus estimate of ~USD100mn. Also, SCB made a ~USD300mn impairment charge related to investment in China Bohai Bank which was not expected.
Solid capital position – Common equity Tier-1 (CET1) ratio was 14.1%, lower than consensus estimate. The pro-forma CET1 ratio will decline to around 13.2%, which is still within management target range of 13- 14%.
A set of positive guidance – SCB management announced a set of positive guidance: i) raising the medium-term (2022-24e) revenue growth target from 5-7% to 8-10%; ii) a new target of 10% ROTE by 2024e (vs. the previous target of 7%+ for 2023e and 10% medium-term ROTE); iii) a cost/income ratio of around 60% (vs. 70% currently); iv) lifting NIM sensitivity to 100bp rate rises from USD1.1bn to USD1.3bn and v) a USD750m buy-back announcement and a commitment to target USD5bn+ shareholder returns by 2024e. While SCB’s 2022e guidance is in-line with consensus estimates, the 2024e guidance is significantly higher than market expectations. Notwithstanding the miss in 4Q21 results, the outlook and guidance should be a positive surprise. We lift our Fair Value estimate at HKD66, with an unchanged valuation multiple of 0.55x forward P/B and rolling over our estimates by incorporating BOS’s latest Fed rate hike forecast.
ESG updates
Strong responsible lending framework – SCB leads peers in adopting responsible lending and sustainable business practices that support the ESG rating. SCB has a strong management framework which may help mitigate environmental risks in its corporate loans portfolio. SCB’s employee attrition has also reduced, contributing to its human capital performance. However, multiple ongoing controversies weighs on the rating. SCB integrates ESG considerations in its corporate lending, with 1,090 transactions assessed under its dedicated environmental and social risk framework in FY2020. These practices may help mitigate potential financial or reputational risks arising from its loan book. However, SCB has been criticized for its funding of palm oil companies allegedly involved in forced labor and deforestation. SCB has detailed policies related to financial crime, along with board oversight of ethics issues. BUY. (Research Team)