Analyst Note| Michael Wu, CAIA |
Hang Seng Bank’s first-half results were below our expectations, with net profit declining 46% against the same period last year. While we had expected weaker fees, the near 30% decline in net fee income was more severe than our anticipation as bank branches were closed during the fifth wave and economic uncertainties led to weaker investor sentiment. Management noted it expects challenges to remain for the second half, given inflationary pressure and geopolitical tensions. We continue to see the higher interest rate environment as a positive near-term driver for Hang Seng Bank. We expect higher rates to continue to flow through to Hibor in the second half, and accelerate in 2023, thus pushing the bank’s net interest margin, or NIM, further higher. We have revised our assumptions for higher NIM, though this is offset by a weaker fee income and loan growth assumptions and higher credit cost. Our fair value estimate for Hang Seng Bank is maintained at HKD 177 but we lower our 2022 dividend forecast slightly to HKD 5.44. This implies the bank trades at a 26% discount to our fair value estimate and a 4.2% dividend yield, as at the close of business on Aug. 1.