Hang Seng Bank:In line;clean and steady with highest rate leverage but priced in

What surprised us

HSB 2H16 EPS of HK$4.11 (-2% hoh, +10% yoy) was 4% below GSe due tolower insurance business income as bond yields rose. NII (+3% vs GSe)and NIM were above expectations (+2bp vs GSe). Deposit spreads helpedNIM as lending spreads continued to remain under pressure. Costs weretightly controlled (+1% vs GSe), with FY16 costs -2% yoy and cost/incomeratio at 33.5% for FY16 (-30bp yoy). 2H16 revenue and PPOP were up 6%and 10% respectively on a yoy basis. Credit quality remained benign with afall in the NPL ratio and credit costs hoh. DPS was slightly better thanexpected with FY16 DPS of HK$6.1 (GSe: HK$5.9), implying 74% payout.

The capital position remained strong with 16.6%, 15.6% CT1 CAR on YE16stated, after 4Q16 DPS payment.

What to do with the stock

We change 2017E/18E/19E/20E EPS by -2%/+1%/+3%/+5% on a mix ofhigher NII and lower net insurance income. We raise 2017E/18E/19E/20EDPS by 7%/8%/4%/1% after seeing management’s commitment to thereturn of excess capital. As a result we raise our RIM-derived 12m TP toHK$153 (2.00X 2017E P/B) from HK$146 (1.90X 2017E P/B). However, ournew TP offers 6% potential downside to the current share price; hence wemaintain Neutral given the relatively high valuation. Risks: Up: acceleratedcapital return, better NIM on higher HIBOR; Down: slower US$ interest raterises or pass-through