Hong Kong company reporting season

Hang Seng Bank beats expectations to report 29 per cent increase in interim profit

PUBLISHED : Monday, 06 August, 2018, 12:56pm
UPDATED : Monday, 06 August, 2018, 4:41pm

Hang Seng Bank, a subsidiary of HSBC, Hong Kong’s largest bank, on Monday reported a better than expected increase in net profit for the first half of 2018, which rose by 29 per cent thanks to higher interest and fee income.

Its profit rose to HK$12.65 billion (US$1.61 billion) in the first half, or HK$6.62 per share, up from HK$9.84 billion a year earlier. This is higher than the average forecast of a 10 per cent increase – a net profit of HK$10.899 billion or HK$5.65 per share – made by analysts polled by Bloomberg.

The strong earnings growth for large Hong Kong banks still has room to run
Anil Agarwal, equity analyst, Morgan Stanley

“We grew profit before tax by 28 per cent, with solid increases in net interest income and non-interest income. All business lines recorded growth in revenue and profitability,” Louisa Cheang Wai-wan, the chief executive of Hang Seng Bank, said in a result announcement statement.

“With increasingly mobile lifestyles shaping service expectations, particularly among the younger segment, we added value with investments in technology and operational infrastructure that give customers greater flexibility over when and where they manage their finances,” she said.

“Our strong cross-border and cross business connectivity continued to play a key role in capturing new business in Hong Kong and mainland China. Hang Seng China recorded satisfactory growth in profitability despite the high cost of renminbi funding in the first half of the year.”

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The profit for the first half is higher than the last two years, but is below the HK$20 billion reported in the first half of 2015, when the bank made a one-off gain of HK$10.64 billion from selling most of its stake in China's Industrial Bank.

An increase in net interest income of 20 per cent to HK$14.23 billion was the main growth driver at the bank. Consumer lending and financial investments grew while its net interest margin widened to 2.1 per cent from 1.94 per cent in 2017.

Anil Agarwal, an equity analyst at Morgan Stanley, said the bank would benefit from the widening of its net interest margin.

“Hang Seng Bank is likely to be better with net interest margin expansion half on half at about 12 to 13 basis points. There is likely to be an even bigger pick up in the third quarter of 2018,” Agarwal said in a research note before the result announcement. “The strong earnings growth for large Hong Kong banks still has room to run.”

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The bank has a lot of low-cost deposits from customers, which it can lend in the interbank market at a profit. The Hong Kong Interbank Offered Rate, which rose to 2.2 per cent in June, its highest in 10 years, has benefited big players such as Hang Seng Bank.

The improved result was also down to lower bad debt provisions in the first half, which dropped by 64 per cent to HK$238 million, thanks mainly to an improving credit environment in Hong Kong, which offset an increase in bad debt in mainland China.

Strong investment market sentiment also helped the bank, which benefited from higher fee income from stockbroking and fund sales, resulting in a 21 per cent increase in net fees to HK$3.898 billion.

Hang Seng Bank’s operating profit increased by 25 per cent to HK$14.66 billion in the first half, while fee income from its wealth management business rose by 17 per cent.

The bank will pay an interim dividend of HK$2.6 per share, higher than the HK$2.4 paid in the first half of last year. At the end of June, the bank's total capital ratio was 19.6 per cent, down slightly from 20.1 per cent at the end of last year.

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Cheang said the trade war and market volatility could be challenges for the bank in the second half of this year. “We will take a cautious approach to lending and offer new products to meet customers’ needs. Overall, we will see that our asset quality does not decline,” she said.

“There could be a chance for Hong Kong banks to increase the best lending rate in the second half of this year. If that happens, it will benefit our net interest margin in the second half,” said Cheang.

The chief executive said the bank would invest more in digital banking, but had not decided if it would apply for a virtual banking licence from the Hong Kong Monetary Authority.

Margaret Kwan, the executive director and head of retail banking and wealth management at Hang Seng Bank, said customers were being more cautious.

“The stock markets in Hong Kong and overseas have been more volatile. This has led our customers to become more cautious. We will recommend investment products that will suit their needs,” said Kwan.

The bank’s shares rose by 1.6 per cent to HK$205.60 on Monday.