Main beneficiary of interest rate hike
What’s New
• Highest NII sensitivity to interest rate hike
• ECL risk controllable with 7.5% of total loan exposure to China property sector
• Expect strong earnings growth of over 30% y-o-y in FY23F and ROE recovery
• Reinstate coverage with BUY and TP at HK$163
Investment Thesis
Benefit from interest rate hike. In FY21, HSB had 81% of its assets in HKD and USD. With exposure that is higher than its major peers, HSB is the main beneficiary of the HK and US interest rate upward cycle.
Positioned for fee income growth in the long run. HSB has the highest branch productivity in terms of fee income among HK banks, which is helped by its strong presence in the stock market and investment funds.
Lower credit costs in FY23F to provide earnings upside. While credit costs would remain high this year due to a weak 1Q22, we expect more improvements in 2H22 and FY23F, with the economic recovery in HK.
Valuation:
Our target price of HK$163 is based on the Gordon Growth Model of 16% ROE, 3% growth, and 11% cost of equity. Our TP implies a 1.65x FY23 P/BV, slightly lower than its five-year average PB of 1.8x.
Where we differ:
We have a higher NIM forecast in FY22-23F, based on our house view of the 1M HIBOR reaching 2.28% by the end of the year. We expect more interest rate upside as well as higher loan growth in HK in 2023 with the positive expectation of economic recovery.
Key Risks to Our View:
HK economy growth being weaker than expected and asset quality deterioration.