Analyst worried over BOCHK's unsustainable trading income-driven revenue

But pre-provision operating profit rose by 5% to HKD18.9b in the first nine months of 2012.

According to Maybank Kim Eng, 9M12 PPOP reached 79% of our old FY12 estimates. BOCHK’s 9M12 reported pre-provision operating profit (PPOP) rose by 5% YoY to HKD18.9b.

Here's more from Maybank Kim Eng:

Stripping out the Lehman Brothers related write-back, core PPOP rose by 24% YoY, as rise in income (20%, higher net interest income and trading gain) was much higher than rise in expenses (12%).

BOCHK’s 9M12 PPOP reached 79% of our old FY12 estimates. On QoQ basis, 3Q12 core PPOP rose by 1% QoQ, to HKD6.1b.

Comparing 9M12 with 9M11: 1) Net interest income rose (due to improving return on CNY business, volume growth and improving yield). 2) Net interest margin (NIM) for both CNY business and HKD business both improved.

3) Trading gain rose, due to mark to market changes. 4) Net fee income fell slightly (securities brokerage and insurance). 5) There was a net charge of loan provisions, versus write-back in 9M11 (should be well-expected, as BOCHK already incurred net charge of loan provisions during 1H12).

Comparing 3Q12 with 2Q11: 1) Rise in income driven by trading gain and insurance segment. 2) Net interest income fell and NIM narrowed. 3) Net fee income also fell from the high base in 2Q12. 4) Loan provision charges fell.

More concern on latest operating trends. While 9M12 PPOP reached 79% of our old FY12 estimates, we are slightly concerned about: 1) The strong revenue seems mainly driven by trading income, which may not be sustainable. 2) The QoQ fall in net interest income and NIM (arguably from a high base in 2Q12 though).

On the positive side, the QoQ fall in loan provision charges was a positive surprise, and we are comfortable with its asset qualities.