NIM Remains On Uptrend: BoCHK attended our Greater China Financials Day today. The company saw decent NIM expansion in Q1 and expects the uptrend to continue. Although deposit competition heated up a little in Mar and Apr, pressure from the funding costs remains manageable. We reaffirm our positive view on NIMs as the upcycle in base rates goes on.
Loan Growth Outpacing The System: BoCHK grew its loan book by 15.8% in 2017, largely in line with the system’s 16.1%. Loan growth in Hong Kong has then remained very robust, ytd +7% by April (+17.1% yoy). This year so far BoCHK has likely outgrown the system (+5.7% qoq in 1Q18). We believe the high single-digit loan growth guidance is overly conservative. We forecast 11% loan growth for 2018 and expect it to slow down to 8% in 2019 and 6.3% in 2020.
Robust Fee Income In 1H: Securities brokerage accounts for 17% of BoCHK’s gross fee income, which is supported by buoyant equity market turnover in Hong Kong in 1H18, with HK exchange ADT +67% yoy. Although the market has become more volatile in Q2, ADT is still up 38% yoy (down 27% qoq). The fee income trend in Q2 should remain resilient on a year-on-year basis.
Asset Quality Unchanged: The recent defaults in China had muted impact on BoCHK’s asset quality as its customer base are mainly red chip or blue chip large corporates. As the sole RMB clearing bank in Hong Kong, short term FX volatility has very limited impact on P&L.
ASEAN Expansion: BoCHK are yet to acquire parent’s Laos, Myanmar and Singapore operations, subject to regulatory approval. The Singapore arm is the biggest entity in ASEAN, and once concluded could increase BoCHK’s ASEAN assets to >10% of group, currently sub 5%. Assuming 2x PB for the Singapore asset, the acquisition would reduce BoCHK’s CET1 by c2ppt and increase the RoE by 0.7ppt.
Reiterate Buy: BoCHK’s fundamentals remain extremely solid. Recent concerns regarding credit defaults in China and RMB depreciation have no significant impact on the bank. Shares now trade at 1.5x PB, which looks attractive versus historical average of 1.7x and peers (1.6x for DBS, 2.4x for HSB). Reiterate BoCHK as our top pick within Hong Kong Banks, Target Price HK$44.6.