• Improvement in net interest margin
• Stable asset quality
• The preferred Hong Kong domestic banks
Improvement in net interest margin (NIM) – 1Q22 pre-provisions operating profit (PPOP) rose 7% YoY (or +54% QoQ), driven by loan growth. Loan growth was robust in 1Q22 and rose 5% QoQ (or +7% YoY), stronger than the industry average. Management maintains the mid to high single-digit loan growth target for 2022. NIM edged up 2bps QoQ in 1Q22 and is expected to continue to improve in 2Q22 and the benefit of rate hikes should filter through from 2H22 given the increase in HIBOR is expected to lag US rate increases. 1Q22 wealth management fees dropped amid Covid-19 restrictions and weak investor sentiment. Having said that, loan growth and loan-related fees are expected to normalise in 2Q22. We expect NIM and fee income momentum to pick up in the coming quarters.
Stable asset quality – Credit cost rebounded to 23bps in 1Q22 owing to changes in macroeconomic variables and some provisions for China property. BOCHK has about HKD100b exposure to mainland China property developers (or about 6% of total loans), of which about 76% is for stateowned enterprises and 24% related to private enterprises. From a geographical perspective, exposure is to the GBA and top-tier coastal cities. With recent supportive policy measures and a declining trend of infection cases, management guided a steady credit cost YoY in 2022.
The preferred Hong Kong (HK) domestic bank – BOCHK’s 1Q22 results outperformed its peers with positive PPOP growth. Its relatively high dividend yield among peers would support relative share price outperformance in the near-term. BOCHK remains as the preferred play among HK domestic banks on the back of a relatively more attractive valuation. Its return-on-equity gap with Hang Seng Bank has narrowed. The stock is trading at 0.95x forward Price-to-Book (P/B), which is around at 14% discount to its historical average. Tailwinds from higher rates and its unique position to benefit from the GBA Wealth Connect should support the longterm development. We lift our fair value (FV) estimate to HKD35.3 by rolling over the estimates to next year and applying the same valuation multiple of 1.1x forward P/B multiple, which is at historical average level.
Strong talent management practices; environmental opportunities in financing – There have been improvements to help reinforce workforce morale in the form of diversity awareness training; and its three-year average attrition was down to 12.9% in 2020 from 15.7% in 2019. Its strong governance and consumer protection practices also weigh in.
BOCHK appears to lead peers in governance practices. The board has independent majority and fully independent key committees, and this may help exert objective management oversight. The bank appears to lead peers in policies and programs of business ethics (including anti-bribery.
BOCHK appears to lead peers in financing low-carbon transformation: it launched green time deposit and SME incentives in 2020, buoyed by HK government’s green credit assessment. Further, it became a supporter of the Task Force on Climate-related Financial Disclosures (TCFD) and performs climate change stress testing in 2021. BUY. (Research Team)