WHAT THE BROKER SAYS

Morgan Stanley sees only a modest earnings outlook for Hang Seng Bank, which reported last week that overall net profit fell 2.31 per cent to $6.04 billion in the first half of the year. It expects earnings growth of -2 per cent between 2004 and 2006 and considers the stock expensive at 19 times earnings and 5.3 times book value for the 2005 estimate.

A flatter yield curve and reduced dividend yield spread over money market rates are key catalysts for under-performance.

The broker says first-half earnings were 7 per cent ahead of forecasts but operating performance was weak. Operating profits were down 17 per cent year on year and 12 per cent lower than the broker's expectations. Gains on property revaluations helped to prop up earnings.

Loan growth was 6 per cent against the market average of 9 per cent. Management is focused on profitable growth rather than market share, hence the muted progress. Higher rates ate into wealth management revenues and this will continue to be a challenge in the second half. Bad debts reflected higher non-performing loans and low provision cover. The culprit was commercial loans where provisions annualised at 1.6 per cent of loans, which was clearly unexpected.

Morgan Stanley has a target price of $94 on the counter and rates the stock 'underweight', which means its return is expected to be below the return of the MSCI Hong Kong index over the next 12 to 18 months.

The counter closed on Friday at $107.20.