Hang Seng Bank:Hanging tough

HSB is relatively well positioned in a difficult environment.

Hang Seng’s 1H16 NPAT was slightly below expectation driven by higherbad debt charges and negative property revaluation. Momentum islacking but the balance sheet position remains strong. We trim our 16-18CL NPAT by 1-2% and retain our dividend forecasts. We reiterate ourUnderperform recommendation with a revised target price of HK$137.50previously HK$140.50).

A weak start to the year.

1H16 reported NPAT of HK$8.0bn was down 60% YoY but up 12% HoH.

Margins expanded by 5bp HoH to 1.85% driven by higher non-loan assetyields and cheaper funding costs. This offset weak fee income which was heldback by brokerage and trade. The cost-to-income ratio was in line at 33%.

Net bad debts as a % of loans were higher than expected albeit charge-offsremain low at 21bp. This, coupled with a negative property revaluation wasthe driver of the 2% miss at the NPAT line. The effective tax rate was 15.7%.

The interim dividend of HK$2.20 was in line (1H15: HK$2.20).

Robust balance sheet position despite lack of momentum.

Loan balances and deposits contracted by 1.5% and 0.8% respectively in1H16. The loan-to-deposit ratio fell to 68.5% (2H15: 69.1%). The gross NPLratio rose to 0.55% (2H15: 0.40%) on the back of higher absolute NPLs tocorporates in mainland China. The coverage ratio declined to 47% (2H15:59%). The leverage ratio declined to 7.4% and the average LCR increased to257.1%. The reported CET1 ratio was 16.8%. BVPS declined from HK$70.6 in2H15 to HK$67.9 on the back of the 2H15 dividend payment which included aspecial dividend and HK$848m of negative moves below the line.

Limited changes to EPS; no change to DPS.

The operating environment remains challenging. Loan momentum is likely tobe subdued during our forecast time horizon. Lower for longer rates andcompetition will hold back the margin, non-NII will be mixed and bad debtsare likely to rise. We adjusted 16-18CL NPAT down by 1-2% and retain ourdividend forecasts.

Reiterate Underperform with a revised HK$137.50 TP.

We value HSB on a target PB multiple derived using the Gordon GrowthModel. The PB target is based upon excess capital-adjusted 17CL ROE of12.9%, COE of 8.7% and terminal growth rate of 4%, for a target multiple of1.9x. We apply this to 17CL BVPS of HK$72.6. We reiterate our Underperformrecommendation with a revised target price of HK$137.50 (previouslyHK$140.50). HSB remains our preferred pick among domestic HK banks.