www.dbsvickers.com sa: AH HSI: 22,151 Analyst Alexander LEE CFA +852 2971 1930 alexander_lee@hk.dbsvickers.com Shujin CHEN +852 2820 4920 shujin_chen@hk.dbsvickers.com Nicole WU +852 2820 4919 nicole_wu@hk.dbsvickers.com Loan to deposit ratios 505560657075808590060708091011121314Ov erall L/D ratioHK$ L/D ratio(%) Source: HKMA, DBS Vickers HK$ M2 growth and past QEs -20-15-10-50510152008091011121314(% yoy)(QE1)(QE2)(QE3)(tapering) Source: HKMA, DBS Vickers DBS Group Research . Equity 1 April 2014 China / Hong Kong Monthly Chart Book Pulse of Hong Kong Banks (April 2014) Refer to important disclosures at the end of this report LDR reaching pressure levels • 2013 earnings were upbeat, but some banks’ capital and dividends were disappointing • Latest HKMA figures and QE tapering suggest near term NIM and ROE will be challenging • Neutral towards Hong Kong banks; prefer HSB and DSBG LDR reaching pressure levels. No wonder the HKMA was worried. Loan growth in February accelerated to 22% y-o-y, while deposit growth was only 10.6% in comparison. Trade finance remained a strong driver and was up 48% y-o-y and 2.6% m-o-m. But loans for use in Hong Kong surprisingly jumped 4.1% m-o-m and 18% y-o-y. As a result of the rapid loan growth, the overall loan to deposit ratio (LDR) climbed to 74%, which is the highest since 2000. However, HK$ LDR was flat and did not increase, due to an increase in HK$ deposit mix. Nonetheless it is still close to 2011’s peak. 2H13 earnings were better than forecast. The sector’s 2H13 earnings were better than expected. Four of the five banks we cover had 2013 net profit that beat consensus. The key positive surprise was 2H13 NIM, which expanded 7bps h-o-h on average. This was driven by higher money market rates in China and lower funding cost pressure. The strong NIM momentum helped the sector’s PPOP expand 25% y-o-y in 2H13. Asset quality was also a bright spot as no banks experienced a sizeable NPL jump in 2H13. But capital and dividends were disappointing for some. However, the ability to pay out earnings were disappointing for BOCHK and DSBG. In response, we downgraded BOCHK to HOLD due to lower dividend payout ratios and leverage that are needed to support the bank’s earnings growth. Meanwhile, we also trimmed DSBG’s TP to factor in ~8% EPS dilution from its proposed rights issue. Neutral call for sector; prefer HSB and DSBG. We are Neutral towards Hong Kong banks in 1H14. High LDR and QE tapering limit NIM and ROE improvement in the near term. ROE enhancement from expected US$ interest rate hikes are still too far away. The capital and dividend challenges also mar near term sentiment, while M&A excitement is nearing an end. We believe the sector will likely be cocooned for much of 2014. But Hong Kong banks have potential to transform when US$ interest rate hikes are more imminent, since subsequent ROE and earnings enhancements can drive re-rating. We prefer Hang Seng Bank (11.HK) and DSBG (2356.HK) at this moment. We like HSB’s stable funding base and NIM resiliency in the face of tight liquidity. HSB also has a potential to boost dividend payout should it dispose its Industrial Bank stake. We also see value in DSBG, as its earnings should benefit more than peers in a rate-hike scenario. barbarayy_tong@citickawahbank.com Barbara Tong 04/02/14 03:20:35 AM CITIC Bank International China / Hong Kong Monthly Chart Book Pulse of Hong Kong Banks Page 2 Table of Contents How are valuations of Hong Kong banks? 3 What is our order of preference for Hong Kong banks? 4 How have share prices performed in absolute and relative terms? 5 What is the ROE outlook for the sector? 7 How is the macro picture of Hong Kong? 8 How are key performance indicators from HKMA for Hong Kong banks? 9 How are reference interest rates? 10 How are bond investment yields or prices? 11 How are key macro indicators for the US and the Fed? 13 How is deposit and money supply growth for Hong Kong banks? 15 What are key trends for loans? 16 How is Hong Kong’s mortgage market? 18 How is the property market in Hong Kong? 20 How is Hong Kong’s offshore Rmb? 21 How were 2H13 operating trends? 22 How do the banks compare across key operating metrics? 23 How are asset quality and provision levels? 28 What are the differences in asset, liability, and loan mix between the HK banks? 29 How do income structure and fee source differ between HK banks? 30 How do the current P/B levels compare with past levels? 31 What price ranges are PB bands suggesting? 32 Peer comparison tables 33 barbarayy_tong@citickawahbank.com Barbara Tong 04/02/14 03:20:35 AM CITIC Bank International China / Hong Kong Monthly Chart BookPulse of Hong Kong Banks Page 3 How are valuations of Hong Kong banks? Peer comparison Bloomberg Closing Stock TargetUpside/EPS CA GRTickerprice ratingPrice DwnsideF Y13F F Y14F12-14 F Y13F F Y14F F Y13F F Y14F F Y13F F Y14F(HK$)(HK$)(%)(X)(X)(%)(%)