恒生银行（00011.HK）：Earnings resilient but dividend continues to lag. Sell

机构：德意志银行

评级：Sell

目标价：169港币

DPS is likely to move up only on a steady path 

HSB's premium valuation is a reflection of the quality of its retail franchise and earnings stability, as seen in today's result (2% above Dbe). Moreover, its dividend policy has historically been one of the key stock price drivers. However, in today's results, there was no positive surprise – a progressive absolute dividend payout of HKD6.70/share in FY17 (+10% YoY). The current yield looks low (3.9%) vs. the historical average (~5%) as the increase in dividend payout fell to catch up to share price expectations. At 2.5x P/B and 14% 2018E RoE, the valuation looks demanding; maintaining Sell. 

Key highlights of 2H17 results: 

Net interest income (+8% HoH, +13% YoY) was supported by loan growth (+8% HoH) although margins remained flat at 1.94% HoH, due to loan competition for corporate lending. 

Non-interest income (-16% HoH, +20% YoY) was largely attributable to lower FX and trading gains, while fees remained resilient (+5% HoH, +12% YoY). WM income fell 16% HoH (+26% YoY). 

Asset quality remains benign, with the impaired loan % at 24bps (1H17: 42bps) while credit costs dropped to 10bps (1H17: 19bps). Provision coverage improved to 81% (from 68% in1H17). Overdue loans fell to 20bps (1H17: 26bps). 

Loans (+8% HoH) and deposits (+6% HoH): Loan growth was strong, supported by overseas lending (+13% HoH) while domestic lending rose (+7% HoH) on corporate property (+7%), financial concerns (+33%), mortgages (+5%) and credit cards (+15%). LDR tightened to 73% (1H17: 71%), with better CASA at 79% (1H17: 78%). 

Others – capital: CET1 remained strong at 16.5% (1H17: 16.2%), and should be 15.5% after stripping out the 4Q17 dividend. CTI was 33% (1H17: 30%) and annualized RoE was 14.4% (1H17: 14.5%). 

Maintaining Sell; key analysts’ briefing takeaways; risks 

As expected, much of the focus of the analysts’ briefings was on dividend policy and NIM trend – the 2H17 outcome was a disappointment, in our view. As discussed above, dividend payout remains a crucial share price driver for HSB, on which expectations have run ahead of fundamentals. Due to progressive absolute DPS policy, the payout ratio actually fell to 64% (FY16: 72%) – not to mention that this ratio is already much higher than that of SG banks (our preferred sector). Management also highlighted that there is a risk of higher RwA reflation from the final Basel ruling (vulnerable given HSB’s lowest risk weight density among coverage banks), which could put pressure on seemingly higher CET1. The NIM transmission from higher rates have been low in 2H17 largely due to loan competition and HIBOR has been relatively flat on an average basis. While the bank believes higher rates in the US should continue to benefit the bank’s NIM, this has been largely factored into expectations already and if HSB has to issue TLAC bonds in the future, this could also result in higher cost of funds.