Thanks to steady growth in its offshore RMB business.
Barclays believes offshore RMB margin erosion is fully priced in, after BOCHK’s 13% relative underperformance vs the HSI over the past 3 months. BOCHK is the best capitalised name in Barclays' coverage (FY12E Tier 1 CAR of 13%) and it sees significant upside risk to its already higher than consensus dividend payout estimate of 65-67% for FY12-14E, implying ~6% dividend yield.
Here's more from Barclays:
Steady growth in offshore RMB business is no longer a significant threat to HK$/US$ liquidity, given potentially more capital inflows into the HK$ as interest rates should remain low until FY15. We expect HK$ funding costs to remain low in the medium term.
BOCHK is best geared to any potential positive changes in the offshore RMB market deregulation with the largest 23% CNH deposit market share at 1H12. We believe that the recent CNH margin erosion is now fully priced in.
BOCHK’s CNH best time deposit rate rose rapidly in 3Q12 (by 1% to 2.8% in September), but has since stabilised, down by 25bps since October to 2.75% currently vs stable to increasing rates for large peers.
CNH loan yields remain largely changed, but dim sum bond yields and BOCHK’s 3M R-HIBOR have risen by 85bps and 37bps, respectively, since September. Therefore, we believe CNH margins have troughed in 3Q12.
Upside risk to dividend yield
We believe there is upside risk to our dividend payout ratio estimate of 65%-67% in FY12-14E (vs Bloomberg consensus expectations of 63%), given BOCHK’s strong capital adequacy ratio with Tier 1 CAR of 13% in FY13E, and aggressive expansion into mainland China is unlikely given its parent’s presence. As such, we believe there is significant upside risk to our dividend forecast.
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