Hong Kong company reporting season

Hang Seng Bank cuts risky China lending after full year profits fall 41pc

PUBLISHED : Tuesday, 21 February, 2017, 1:05pm
UPDATED : Tuesday, 21 February, 2017, 11:00pm

Hang Seng Bank said it has reduced risky lending in mainland China after it reported a 41 per cent slump in profits last year due to rising bad loans and lower fee income, factors weighing on a balance sheet that was boosted the previous year by a one-time gain.

The lender, a unit of HSBC, said on Tuesday net profit last year was HK$16.21 billion (US$2.09 billion), down from earnings of HK$27.49 billion the previous year, which had been boosted by a one-off gain of HK$10.64 billion from the disposal of most of its 11 per cent stake in Shanghai-listed Industrial Bank in 2015.

Earnings per share last year were down 42 per cent to HK$8.3.

The results were slightly below the consensus forecast for a net profit decline of 40 per cent among analysts polled in a Thomson Reuters survey. Excluding the one-time gain, net profit fell 4 per cent from 2015.

“The uncertain global environment, economic deleveraging on the mainland and strong competition in the banking sector will continue to create challenging operating conditions,” said Rose Lee Wai-mun, Hang Seng’s vice-chairman and chief executive on Tuesday.

She blamed the profit decline on an increase in bad debt, valuation losses on its property holdings, and lower fee income from trading stocks and funds.

“Hang Seng Bank has cut down some high risk lending in China, mainly to the commodities and other sectors which have the oversupply problem, or the companies we do not really understand well,” she said. “We have shifted our focus to increase lending to companies we know well, which would improve credit quality this year.”

The uncertain global environment, economic deleveraging on the mainland and strong competition in the banking sector will continue to create challenging operating conditions
Rose Lee Wai-mun, Hang Seng Bank

The lending policy changes came after bad-debt provisions last year rose 19 per cent to HK$1.31 billion, which Lee said reflected “the more challenging credit environment” in China due to some state-owned companies hard hit by oversupply problems.

Net fee income dropped 16 per cent to HK$5.94 billion, as poorer stock market sentiment led to a 37 per cent decline in stockbroking commission, while fund product sales dropped 11 per cent annually. This was offset by higher insurance commissions, which were up by 43 per cent.

Net interest income, however, rose 5 per cent year on year to HK$22.25 billion due to a 3 per cent increase in customer deposits and an improvement in net interest margins by two basis points to 1.85 per cent.

Hang Seng Bank shares closed at HK$163.3 on Tuesday, up 0.12 per cent from the previous close on Monday. The results were announced at the trading lunch break on Tuesday.

The bank will pay a final dividend of HK$2.8, bringing the full-year dividend to HK$6.1 for 2016, down from HK$8.7 a share in 2015 when it paid a special dividend of HK$3 a share.

“Hang Seng Bank reported its second half 2016 profit of HK$8 billion, in line with our estimates,” Anil Agarwal, an equity analyst at Morgan Stanley Asia, said in a research note after the results announcement.

Agarwal said the downside risk for Hang Seng Bank would be a sharp increase in bad loans in Hong Kong and China. “Also, a very high interest rate increase would be likely to cause a sharp property price correction in Hong Kong, thereby taking up risk weight densities,” Agarwal said.