BOCHK's net interest margin expected to fall to 1.68%

But credit cost seen to rise.

According to Maybank Kim Eng, CET1 CAR of BOCHK fell to 10.6% in Dec 2013. As a systemic-important bank in Hong Kong, they see chance for the HKMA to request for a minimum CET1 CAR of 11-12% for BOCHK before 2018. 

This will trigger BOCHK to lower its loan growth to 8-9% p.a. during 2014-16 (10.3% YoY in 2013). Besides, BOCHK may shift towards low-yield government paper and shorten the duration of its bond securities.

Here's more from Maybank Kim Eng:

We expect its NIM to fall from 1.70% in 2H13 to 1.68% during 2014-15.

A rise in credit cost in 4Q13. BOCHK reported a write-back in loan-loss provisions in 3Q13. However, its credit costs were 0.09% in 2H13, implying a rise in credit costs in 4Q13.

We believe this could be related to trade finance and offshore loans, which have low collateral coverage (<30%).

BOCHK will continue to grow cross-border corporate loans in 2014. We are not sure whether this will result in higher NPLs given potential slowdown in China’s economic growth. We forecast its credit cost to stay at 0.08% in 2014.

Cutting dividend payout. To enhance its CET1 CAR in the coming years, BOCHK lower its dividend payout target from 60-70% to 40-60%. The dividend payout ratio was 48% for 2013. We estimate BOCHK needs to lower the dividend payout ratio to 40% before it could increase its CET1 CAR to 12% by end-2016.