Hang Seng Bank exceeds consensus estimates with 1H14 net profit of HK$8,468mn

Reflecting unexpectedly better non-interest income.

Hang Seng Bank reported 1H14 net profit of HK$8,468mn (-54% y/y and 3% h/h), 7.8%/1.7% above our/ consensus estimates, largely reflecting better-than-expected non-interest income and lower credit costs. According to a research note from Barclays, PPOP was HK$9,833mn, up 8% y/y and flat h/h.

Excluding the reclassification of Industrial banks and property revaluation, underlying net profit was up 6% y/y.

It was mainly driven by loan growth (9% y/y), margin expansion (+8bp y/y) and fee income growth (+4% on both h/h and y/y). Operating cost was up 7% y/y and down 2% h/h, with cost-income ratio down 1bp y/y to 32.1% (2H13: 32.6%).

Overall, Hang Seng Bank delivered a decent set of core underlying results, in Barclays' view.

Here's more from Barclays:

Net interest margin remained largely stable on h/h basis. Net interest margin in 1H14 was 1.92%, down 1bp (by our estimates) h/h but up 8bp y/y.

Net interest income was up 8% y/y and stayed flat h/h.

In Hong Kong, improvement in the spread on corporate and commercial lending was partly offset by the spread compression in trade-related loans and mortgage.

Margin in China improved 20bp y/y, reflecting better deposit spread and a less volatile market.

Funding competition relaxed a bit in July, but management continues to see pressure in 2H14.

Loans increased by 8% h/h and 9% y/y, which was mainly driven by property development and investment loans, which was up 15% h/h.

Deposits grew 4% h/h and 10% y/y and there is a negative deposit mix shift with current/saving deposits accounted for 66% (vs. 2H13: 70%), which probably reflected the deposit competition in 1H, in our view.

LDR was up 2.6% h/h to 73.8% in 1H14 (1H13: 74.5%).

Asset quality remains good. NPL ratio was down 2bp h/h to 0.20% (1H13: 0.22%) with credit cost down 1bp h/h to 0.11% (1H13: 0.22%).

Asset quality in Hong Kong remains sound.

However, management expects asset quality deterioration in 2H14 given the slowdown of China economy and slowdown of property market in Hong Kong.

Going forward, management will continue its prudent strategy in lending.

Fully loaded Basel 3 CET1 was 9.6% in 1H14 (2H13: 10.4%), a drop of 80bps h-h. Total RWA increased by 11% (9% of the growth were related to loan growth and credit migration, while the other 2% growth were related to the use of more prudent model to calculate RWA and changes in risk weighting related to mortgage).

We don’t think HSB needs equity raising as selling its stake in Industrial Bank could increase the bank’s capital ratio by 5%-plus, making its fully loaded CET1 close to 15%.

We expect HSB to sell its Industrial Bank stake when possible.