Hang Seng Bank's ROE to fall to 14% for 2013

It's down from 22.6% for 2012.

According to Barclays, HSB reported net profit of HK$19.4bn for 2012, 5% above its estimate and 9% above the Bloomberg consensus mainly due to 1) a property revaluation gain of HK$776mn; 2) low credit costs of just 8bps; 3) fee income strength; and 4) the contribution from Industrial Bank (~28% of PBT).

Here's more from Barclays:

The pre-provision operating profit (PPOP) was in line with our estimate as strong fee income was offset by lower forex and insurance income. The margin was flat h/h for 2H12 at 1.85%, in line with our estimate.

We raise our estimates 3% for both 2013 and 2014 to reflect the lower credit costs and tweak our 12-month price target to HK$100 (from HK$99.30).

Outlook for 2013 – lower contribution from IB and pressure on loan yields: Management sees stable loan growth but loan yields are experiencing some pressure from the return of competition by some foreign banks.

Starting from January, Industrial Bank is no longer to be accounted for as an associate. HSB's profit should be about 21% lower if only the dividend income from IB (rather than the profit) is included as IB's dividend payout ratio is only about 15%. Thus, we expect HSB's underlying ROE to fall to 14% for 2013 from 22.6% for 2012.

400bps off pro-forma core Tier 1 (CET1) on full Basel III implementation: DPS was raised slightly to HK$5.30 vs. our estimate of HK$5.20 although the overall payout ratio fell to 52% (from 54%).

The core Tier 1 (Basel II) was 12.2% for 2012 and the initial Basel III changes, which allows for 1) a concessionary threshold for deductions for non-consolidated financial institutions; 2) timing differences on the recognition of dividends; and 3) the removal of cap on investment property revaluation gains, should result in 1.3% higher CET1.

However, management disclosed that on full Basel III implementation, core Tier 1 would be ~400bp lower than the current level, i.e. ~8.2%, one of the lowest vs local peers. Assuming no change to DPS of HK$5.30 for the next five years, we forecast CET1 will be 10% by full-year 2017.