Hang Seng Bank's profit tumbled 15.1%

The banks's revenue growth is losing steam.

Hang Seng Bank’s total income grew 7.4% YoY in 1H14, down from 15.1% YoY in 2013.

According to a research note from Maybank Kim Eng, this was due to: slight NIM pressure (1.92% in 1H14 vs. 1.93% in 2H13); sluggish net fees growth (+4.3% YoY) and decline in forex income (-16.4% YoY).

Management has concerns over rising funding costs in China in 2H14. Unlike BOCHK, HSB will not launch FOREX products to customers to hedge against RMB depreciation.

Maybank Kim Eng expects Hang Seng Bank’s total income to maintain moderate growth of 5.7% YoY in 2014.

Here’s more from Maybank Kim Eng:

1H14 earnings close to consensus. Excluding the reclassification impact of Industrial Bank, net profit fell 5.4% YoY to HKD8.5b in 1H14, in line with Bloomberg consensus forecast (HKD8.3b).

Slight concerns over China asset quality. Loan impairment charges in China were HKD105m in 1H14, up significantly from HKD25m in 2H13.

This was due to the downgrade of a few corporate customers. NPL ratio of its China loans was 0.42% in Jun 2014, higher than the group average ratio of 0.2%.

We raise our loan impairment charges forecast by 5% for 2014. Fully-loaded CET1 CAR of 9.4 in Jun 2014.

Based on our estimation, even if HSB maintained its DPS at HKD5.5 during 2014-18, we estimate that its CET1 CAR will remain low at about 11% by end-Dec 2018.

If we assume a minimum CET1 CAR of 13%, we estimate that HSB will need to replenish its equity or tier-1 capital by HKD14b.

We estimate a EPS and ROE dilution of 3% and 40bps if HSB issues preference share with net funding cost of 3.5% in 2015.