What to expect of BOCHK in 2013

Offshore RMB business is key.

According to Barclays, BOCHK reported net profit of HK$20,930mn, 2% above Bloomberg consensus estimates, but 3% below our forecasts.

Net interest income was slightly lower than our estimates (-4.2% h/h), due to margin contraction of 8bps h/h to 1.56% from: 1) lower yield on debt securities and interbank placements; 2) higher RMB funding cost; and 3) a shift into shorter duration investments securities.

Here's more from Barclays:

Good progress in RMB deployment: Despite higher RMB funding costs and fierce deposit competition in 2H12, deployment of RMB funding improved substantially. RMB LDR rose to 42% (from 32% in 1H12). RMB advances (including other accounts) rose by 42% h/h to HK$97.6bn, while RMB deposits rose by 8% h/h to HK$235bn (in line with industry growth).

We note that RMB disclosure combines both onshore and offshore RMB business. We expect offshore RMB margin to improve in FY13 since deposit costs have eased in 1Q13 so far.

A few problem loans? Credit cost increased substantially to 20bps (ann.) in 2H12 from a very low base of only 2bps in 1H12, and NPL ratio rose from 0.10% to 0.26% due to the “downgrade of a few corporate loans”. We await management comments for further details.

Dividend payout ratio increased slightly: BOCHK declared a final dividend of HK$0.693/share (full year HK$1.238/share), increasing the payout ratio slightly to 62.6% (from 61.5% in FY11). Core Tier 1 ratio declined slightly to 12.3% (from 12.5%), but was still the highest among local peers.

2013 outlook: BOCHK sees the Hong Kong economy in 2013 remaining "challenging" due to “fiscal uncertainty in the US and further evolvement of the European debt crisis/', "abundant liquidity leading to overheating of the property market", "persistently low interest rates" and "additional regulatory requirements, including the implementation of Basel III".

However, a key opportunity for BOCHK is the continuing development of offshore RMB business. "New initiatives for the Qianhai Cooperation Zone and RQFII are expected to bring new customers and business opportunities to the banking sector in 2013".