INITIATION
COMPANY REPORT
EQUITIES RESEARCH
HOW WE DIFFER FROM THE STREET
440 HK
DAH SING FINANCIAL
Target Price (HKD)
HONG KONG / DIVERSIFIED FINANCIALS
BUY
TARGET
HKD33.90
CLOSE
HKD26.65
UP/DOWNSIDE
+27.2%
INDUSTRY OUTLOOK é
A life insurer for free
BNPP
Consensus
% Diff
33.90
33.88
0.1
EPS 2012 (HKD)
3.93
3.52
11.6
EPS 2013 (HKD)
4.45
3.78
17.7
Positive
Neutral
Negative
12
6
1
Market Recs
KEY STOCK DATA
YE Dec (HKD m)
2012E
2013E
2014E
Operating Profit
1,310
1,446
1,653
CHANGE
Rec. net profit
1,151
1,264
1,444
Initiate with BUY, at a TP of HKD33.90
Recurring EPS (HKD)
3.93
4.32
4.93
EPS growth (%)
11.1
9.8
14.2
Recurring P/E (x)
6.8
6.2
5.4
Dividend yield (%)
4.4
5.0
5.7
Price/book (x)
0.5
0.5
0.4
We initiate coverage on Dah Sing Financial Holdings (DSFH) with a BUY,
as we expect depressed valuations to improve. The market has priced
liquidity, earnings, and capital risks into the banking arm’s valuation,
which we think is excessive. Its insurance franchise, which has delivered
a steady profit, has also been largely ignored/undervalued by the market.
CATALYST
ROE (%)
7.4
7.8
8.4
ROA (%)
0.90
0.93
0.98
Strong NIM rebound amid muted loan growth
Sep-11
DSFH’s underperformance vs its peers since FY11 was primarily due to a
liquidity crunch. As we expect loan growth to remain low in FY12E,
funding pressure would be largely lifted. This makes DSFH the key
beneficiary of its low CASA balance and short-duration loan book. We
expect DSFH to deliver a strong NIM recovery of c.10bp in FY12/13E.
(HKD)
VALUATION
Dec-11
Mar-12
We value DSFH at HKD33.90 based on a SoTP valuation (banking arm,
DSB, at 0.76x FY13E P/BV based on the Gordon Growth Model with an ROE
of 8.9% and insurance arm at 0.5x FY13E P/EV, which is conservative vs
Asian listed insurers). Despite a steady profit stream since FY09, its
insurance operation is trading only at 0.2x FY13E P/EV.
Sep-12
7
2
(3)
(8)
(13)
(18)
(23)
Dah Sing Financial
Share price performance
Dah Sing Life is valued at only 0.2x P/EV
Jun-12
32
30
28
26
24
22
20
18
16
14
Rel to MSCI Hong Kong
1 Month
Absolute (%)
Relative to country (%)
Next results
(%)
3 Month 12 Month
2.7
14.9
(0.7)
(2.2)
2.8
(10.6)
March 2013
Mkt cap (USD m)
1,007
3m avg daily turnover (USD m)
0.9
Free float (%)
COMMENT
Higher focus on bancassurance is a positive change
Major shareholder
12m high/low (HKD)
DSFH has shifted its distribution focus from agency to bancassurance
after seeing high turnover in its agency force. We believe this change is
positive for premium growth. Notwithstanding a lower margin embedded
in bancassurance than in agency products, bancassurance should better
match the core competency of DSB, which has more than 40 branches in
Hong Kong. Its life insurance business has recorded underwriting losses in
FY10-11 due to a lower valuation rate, which is largely offset by a positive
fair value change in its fixed-income investment. We forecast EV to grow
by 7% in FY13-15E. Please also refer to our initiation report on DSB, The
low CASA play (20 September 2012).
Frank Yuen, CFA
Dominic Chan, CFA
frank.yuen@asia.bnpparibas.com
+852 2825 1863
dominic.chan@asia.bnpparibas.com
+852 2825 1175
45
Wong Family (40%)
30.60/19.20
3m historic vol. (%)
27.3
ADR ticker
-
ADR closing price (USD)
-
Issued shares (m)
293
Sources: Bloomberg consensus; BNP Paribas estimates
BNP Paribas Securities (Asia) Ltd. research is available on Thomson One, Bloomberg, TheMarkets.com, Factset and on http://eqresearch.bnpparibas.com/index. Please contact
your salesperson for authorisation. Please see the important notice on the inside back cover.
PREPARED BY BNP PARIBAS SECURITIES ASIA
THIS MATERIAL HAS BEEN APPROVED FOR U.S DISTRIBUTION. IMPORTANT DISCLOSURES CAN BE FOUND IN THE DISCLOSURES APPENDIX
20 SEPTEMBER 2012
Dah Sing Financial
Frank Yuen, CFA
CONTENTS
DSFH’s holding structure and revenue mix ______________________________________________________ 3
Dah Sing Banking Group ______________________________________________________________________ 4
Excessive risk priced into the valuation _____________________________________________________________________________ 4
Strong NIM recovery is the near-term catalyst _______________________________________________________________________ 6
BOCQ – a winning investment _________________________________________________________________ 9
Three growth drivers of the Chongqing banking sector _________________________________________________________________ 9
A small bank in a big pond _______________________________________________________________________________________ 10
BOCQ – SWOT analysis __________________________________________________________________________________________ 13
BOCQ – financial analysis and projection ___________________________________________________________________________ 15
Dah Sing Life _______________________________________________________________________________ 18
Hong Kong life sector – bancassurance accounts for 47% of the market __________________________________________________ 18
DSL: agency business limited by scale ______________________________________________________________________________ 18
More bancassurance is a positive change ___________________________________________________________________________ 18
Bancassurance product comparison _______________________________________________________________________________ 19
Investment book largely de-risked ________________________________________________________________________________ 20
Financial analysis: insurance contribution – a steady profit stream ______________________________________________________ 21
Valuation and risk __________________________________________________________________________ 23
A deeply undervalued insurance franchise __________________________________________________________________________ 23
Holding company discount closed slightly to 33% ____________________________________________________________________ 23
DSL’s implied P/EV at only 0.2x ___________________________________________________________________________________ 24
Our SoTP valuation points to a TP of HKD33.90 _______________________________________________________________________ 24
Risk Experts: Macro _________________________________________________________________________ 26
P&L, Balance Sheet and Cash Flow ____________________________________________________________ 27
To find out more about BNP Paribas Equities Research:
Visit : http://eqresearch.bnpparibas.com/
2
For ipad users : http://appstore.apple.com/BNPP-equities/
BNP PARIBAS
20 SEPTEMBER 2012
Dah Sing Financial
Frank Yuen, CFA
DSFH’s holding structure and revenue mix
Dah Sing Financial Holdings (DSFH) has two main subsidiaries. It owns 74.5% of its banking arm Dah Sing
Banking Group (DSB, 2356 HK), 100% of its Hong Kong insurance subsidiaries Dah Sing Life Assurance and
Dah Sing Insurance (general insurance), and 96% of its Macau insurance subsidiaries. Life insurance
accounted for 86% of its gross premiums written. In 1H12, the insurance arm contributed around 20% of
the group’s profit before tax (PBT).
EXHIBIT 1: DSFH’s holding structure
DAH SING FINANCIAL
74.5%
100.0%
96.0%
Banking arm
HK Insurance arm
Macau Insurance arm
Dah Sing Banking Group
(2356 HK)
Dah Sing Life Assurance/
Dah Sing Insurance
Macau Life/Insurance
20.0%
Bank of Chongqing
Sources: Dah Sing Financial; BNP Paribas
EXHIBIT 2: PBT projection
(HKD m)
EXHIBIT 3: PBT mix – insurance vs banking in 1H12
Insurance
Banking
1,000
Insurance
19.8%
800
600
400
200
0
Banking
80.2%
(200)
2008
2009
2010
Sources: Dah Sing Financial; BNP Paribas estimates
3
2011
2012E
2013E
Sources: Dah Sing Financial; BNP Paribas
BNP PARIBAS
20 SEPTEMBER 2012
Dah Sing Financial
Frank Yuen, CFA
Dah Sing Banking Group
We have also published an initiation on DSB (2356 HK) [The low CASA play, 20 September 2012]. The
following is the key investment summary for DSB.
Excessive risk priced into the valuation
DSB accounted for 80% of the group’s PBT. We have indentified three key risks priced into DSB’s depressed
valuation. We believe the market has overrated these risks.
1
Further NIM contraction for its weak deposit franchise – DSB underperformed the sector when funding
costs spiked in FY11. We believe the market priced in a discount for its poor deposit franchise and
expects a sharp NIM contraction if the deposit war starts again.
We did not expect deposit costs to rise again sharply, as they did in FY11, because loan growth has
slowed drastically to high-single digits from 20%/30% in FY10/11. We expect credit demand to remain
curbed due to slower economic activity. In addition, with a shorter-duration loan book, DSB is now in a
better position to face any funding-cost competition. The faster asset repricing capability would give the
bank more upside on NIM. On the upside, if funding pressure soothes, DSB will be the key beneficiary
under our coverage for its low current account, savings account (CASA) balance.
EXHIBIT 4: DSB underperformed when the composite interest rate picked up
(%)
DSBG relative to HK banking sector (LHS)
35
Composite interest rate (RHS)
(%)
DSBG performance (m-m) (LHS)
0.6
25
0.5
15
0.4
5
0.3
(5)
0.2
(15)
0.1
0.0
(25)
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Note: Rebased as of December 2009
Sources: Bloomberg; HKMA; BNP Paribas estimates
1
Potential impairment losses on its investment portfolio – While DSB has a track record of making
several impairment losses on its investment portfolio between FY08 and FY10, we believe this risk has
subsided. The bank has largely de-risked its portfolio by shifting the exposure from financial institutions
to sovereigns, and by reducing its exposure to securities with credit rating under A- to 34% in FY11 from
47% in FY09. It has no European sovereign credit exposure.
2
Placement risk emerges to support Bank of Chongqing’s (BOCQ) expansion – According to our analysis,
for every RMB1b BOCQ raises, it would only knock off DSB’s core tier 1 (CT1) by 13bp. We believe capital
risk is manageable, as its CT1 stands at 10.3%.
4
BNP PARIBAS
20 SEPTEMBER 2012
Dah Sing Financial
Frank Yuen, CFA
EXHIBIT 5: Key market concerns and our view
Risk priced in
Market view
Our view
What we priced in the valuation
Further NIM contraction due
to a weak deposit franchise
and being vulnerable to a
funding cost hike
Weak deposit franchise made the bank
vulnerable to a liquidity crunch
Slower credit demand in the system should reduce
deposit competition and bode well for margins of
mid-cap banks.
We see DSB would continue to show
sequential NIM improvement of 10-13bp
pa through 2012-15E.
When deposit competition heats up
again, as it did in 2H11, DSB would be a
key victim and could see further NIM
contraction.
Owing to a low CASA balance, DSB benefits the most
when liquidity conditions improved
1H12 was the inflection point for DSB that showed
the first NIM instead of asset yield expansion since
the downward NIM cycle began. We expect asset
yield expansion could continue to lead NIM
expansion.
In addition, DSB has shortened its loan duration
since FY10. As such, DSB has a more liquid book
with higher asset re-pricing frequency. This is
conducive to NIM expansion.
Placement risk for capital call
from BOCQ
An equity raising risk will stem from the
capital call from BOCQ, if its domestic
listing plan is further delayed.
If DSB has to respond to the capital call from BOCQ,
the capital impact will still be manageable. Every
10% of additional capital raised by BOCQ
(RMB638m) would only knock off 13bp of DSB’s CT1.
We factor in a financial leverage of 10x vs
past five years’ average of 11.34x to
factor in a more capitalized position.
We believe DSB could still equity account for BOCQ’s
contribution, even if its stake on BOCQ is diluted.
Impairment losses from
Investment securities
DSB has made several investment
securities losses in its portfolio during
the global financial crisis in 2008. The
market has priced in a high risk of
further investment losses should capital
market volatility remain.
DSB has been de-risking and downsizing its
investment book since 2007 by reducing its
exposure to financial institutions and securities
with a lower credit rating.
Further risk of investment losses is diminishing.
We factor in a provision charge of
27-36bp through FY13-15E vs. 6bp in
1H12.
We believe this is a conservative estimate
that could cushion some unforeseen
investment losses.
Source: BNP Paribas estimates
5
BNP PARIBAS
20 SEPTEMBER 2012
Dah Sing Financial
Frank Yuen, CFA
Strong NIM recovery is the near-term catalyst
Concerns about deposit competition hitting again in 2H12E-13E – We expect Hong Kong banks’ funding
costs to stabilize as long as credit growth stays low. While deposit competition for offshore RMB could
heighten, we believe the overall offshore RMB business is NIM accretive.
DSB is well positioned for NIM improvement – With a high dependence on time deposits (c.76%), DSB is
most sensitive to improvement in cost of funding. Asset pricing has started to catch up, as we witnessed in
mortgage and syndication pricing. While investment yield remained low, the drag on DSB is less obvious
than on its peers for its high gross-loan-to-deposit ratio (83%). Most importantly, DSB has shortened its
loan and investment book drastically. With 25% of loans with remaining maturity less than three months,
we expect a faster upward repricing of the loan yield than for its peers. A faster repricing book also puts
DSB in a better position for any unexpected cost of funding hike.
1H12 is the inflection point – DSB showed the first sharp NIM expansion, of 16bp h-h in 1H12, since 2H09.
This was mainly led by the sharp 21bp enhancement in asset yield, primarily driven by the repricing of
loans. It was the biggest improvement since 1H09. On the funding side, the cost of funding stabilized after
rising for four consecutive interims. As asset-yield repricing is catching up, DSB’s short-duration loan book
should offer plenty of room for further NIM expansion.
EXHIBIT 6: DSB’s NIM bottomed out in 1H12
(%)
NIM
Yield of AIEA
Cost of AIBL
% 3.5
3.06
% 3.0
2.70
2.43
% 2.5
% 2.0
2.68
1.98
2.31
2.40
1.52
1.52
1.31
0.61
0.58
% 0.5
1H09
2.78
1.64
1.66
1.18
1.20
1H13E
2H13E
1.87
1.31
1.14
2.74
2.10
% 1.5
% 1.0
2.47
2.62
2H09
1H10
0.91
0.93
2H10
1H11
1.47
1.62
1.30
1.09
2H11
1H12
2H12E
Sources: Dah Sing Financial; Dah Sing Banking Group
EXHIBIT 7: Lowest CASA balance … (FY11)
(%)
%
Current
Saving
EXHIBIT 8: …but highest reliance on net interest income (FY11)
Net int income
Time
100
%
90
%
80
%
70
%
60
%
50
%
40
%
30
%
20
%
10
%
Non int income
HSB
69.64
30.36
BOCHK
71.25
28.75
BEA
72.85
27.15
30
49
76
70
63
WHB
77.20
22.80
DSBG
77.48
22.52
0
DSBG
WHB
Sources: Dah Sing Financial; Companies’ data
BEA
BOCHK
HSB
0%
20%
40%
60%
80%
100%
Sources: Dah Sing Financial; Companies’ data
DSB’s earnings are most sensitive to NIM expansion among banks under our coverage – With a low CASA
balance (c.24%) and high reliance on net interest income (78% of revenue), DSB is the most leveraged to an
improvement of funding cost. According to our sensitivity analysis, for every 10bp reduction in the time
deposit rate, DSB’s net profit would rise 7%. We factor in a 10-13bp NIM progression per year through
2013–15E.
6
BNP PARIBAS
20 SEPTEMBER 2012
Dah Sing Financial
Frank Yuen, CFA
EXHIBIT 9: NIM sensitivity to time deposit rate increment (FY11)
Increment on
DSB
WHB
BEA
BOCHK
HSB
time deposit rate (bp)
(bp)
(bp)
(bp)
(bp)
(bp)
(20)
154
180
183
139
182
(10)
147
173
179
136
180
0
141
167
175
132
178
10
135
161
171
129
175
20
128
154
67
125
173
Sources: Dah Sing Bank; BNP Paribas estimates
EXHIBIT 10: Net profit as a percentage of impact sensitivity to time deposit rate increment (FY11)
Increment on
time deposit rate (bp)
DSB
WHB
BEA
BOCHK
HSB
(%)
(%)
(%)
(%)
(%)
(20)
14
9
8
5
2
(10)
7
4
4
0
1
0
0
0
0
0
10
(7)
(4)
(4)
(2)
(1)
20
(14)
(9)
(8)
(5)
(2)
Sources: Dah Sing Bank; BNP Paribas estimates
EXHIBIT 11: DSB’s asset yield model
--------------------- 2011 --------------------
---------------- 2012E -----------------
--------------- 2013E----------------
Growth
Dec-11
Asset
yield
Interest
income
Growth
Dec-12
Asset
yield
Interest
income
Growth
Dec-13
Asset
yield
Interest
income
(%)
(HKD m)
(%)
(HKD m)
(%)
(HKD m)
(%)
(HKD m)
(%)
(HKD m)
(%)
(HKD m)
Short term funds
42.4
17,070
0.72
107
1.8
17,369
1.33
227
8.0
18,758
1.56
278
- RMB
62.0
9,985
0.75
63
1.5
10,135
1.80
179
6.0
10,743
2.20
227
- USD
5.0
3,486
0.70
26
2.4
3,570
0.70
24
9.0
3,891
0.70
26
- HKD
55.4
1,694
0.65
9
2.4
1,735
0.65
11
8.0
1,873
0.65
12
5.0
1,905
0.65
8
1.3
1,929
0.65
12
16.7
2,251
0.65
13
Treasuries
- MOP & others
(1.8)
31,513
1.09
353
8.0
34,034
1.26
408
8.0
36,757
1.29
451
- RMB
20.0
601
2.30
11
20.0
721
2.50
16
20.0
865
2.70
21
- USD
2.0
15,994
1.35
190
7.5
17,193
1.40
230
7.0
18,397
1.45
255
- HKD
(30.1)
11,084
0.85
117
7.5
11,915
1.05
120
7.0
12,749
1.05
128
- MOP & others
(12.1)
3,835
0.85
36
9.7
4,205
1.05
42
12.9
4,746
1.05
47
11.8
91,760
3.21
2,852
3.9
95,372
3.38
3,132
8.0
103,045
3.51
3,444
- RMB
24.0
4,002
4.50
166
50.0
6,003
5.20
258
15.0
6,903
5.23
334
Total loans:
By currencies:
- USD
33.7
15,754
3.52
495
2.0
16,069
3.72
587
7.5
17,274
3.76
621
- HKD
7.3
65,767
3.13
2,030
2.0
67,082
3.20
2,101
7.5
72,113
3.31
2,278
- MOP & others
7.4
6,238
2.63
162
(0.3)
6,218
3.02
186
8.6
6,755
3.28
210
4.6
15,760
1.85
292
1.4
15,979
2.26
355
2.3
16,349
2.44
391
- Commercial
20.5
22,686
3.00
636
3.4
23,468
3.31
757
10.1
25,840
3.38
825
- Residential mortgages
41.7
17,083
1.50
223
2.4
17,493
1.60
274
5.9
18,529
1.70
303
By uses:
- Corporate
- Unsecured
(30.3)
8,522
7.00
742
7.6
9,167
7.30
639
10.0
10,082
7.35
700
- Offshore & trade finance
15.8
27,710
3.64
960
5.6
29,265
3.92
1,106
10.2
32,245
4.02
1,224
Total AIEA
15.0
140,343
2.43
3,313
4.6
146,775
2.65
3,767
8.0
158,560
2.76
4,174
Sources: Dah Sing Bank; BNP Paribas estimates
7
BNP PARIBAS
20 SEPTEMBER 2012
Dah Sing Financial
Frank Yuen, CFA
EXHIBIT 12: DSB’s funding cost model
-------------------- 2011 -------------------
-------------------- 2012E ------------------
-------------------- 2013E ------------------
Growth
Dec-11
Funding
cost
Interest
expense
Growth
Dec-12
Funding
cost
Interest
expense
Growth
Dec-13
Funding
cost
Interest
expense
(%)
(HKD m)
(%)
(HKD m)
(%)
(HKD m)
(%)
(HKD m)
(%)
(HKD m)
(%)
(HKD m)
Interbank deposit
56.5
2,385
0.70
14
(22.8)
1,842
0.87
21
47.6
2,719
0.94
17
- RMB
45.0
360
0.75
2
(18.0)
295
1.80
7
50.0
443
2.20
7
- USD
55.0
1,909
0.70
10
(22.0)
1,489
0.70
13
48.0
2,204
0.70
10
- HKD
55.0
104
0.65
2
(21.0)
82
0.65
1
48.0
122
0.65
1
(18.0)
11
0.65
0
(327.3)
(25)
0.65
0
98.1
(50)
0.65
0
16.5
113,369
0.94
987
4.0
117,904
0.91
1,052
8.0
127,336
0.93
1,145
Current & demand
(8.1)
12,558
0.07
9
4.0
13,061
0.06
8
8.0
14,106
0.06
8
Savings
(1.7)
14,572
0.10
15
4.0
15,155
0.10
15
8.0
16,368
0.10
16
Time
25.4
86,238
1.24
963
4.0
89,688
1.17
1,029
8.0
96,863
1.20
1,121
52.1
12,812
1.59
169
1.5
13,004
1.99
257
8.0
14,044
2.03
274
- MOP & Others
Customer deposits
By types:
By currencies:
RMB:
USD:
11.3
13,593
0.97
125
4.0
14,137
0.90
125
6.0
14,985
0.90
131
HKD:
15.5
72,621
0.89
601
4.0
75,526
0.75
554
8.0
81,568
0.79
618
MOP & Others
CD & others IBL
Loan capital
4.2
14,343
0.66
92
6.2
15,238
0.79
117
9.9
16,739
0.76
122
78.0
10,469
3.00
245
5.0
10,993
3.00
322
5.0
11,542
2.50
282
0.0
3,698
4.00
148
38.1
5,107
4.00
176
3.0
5,260
4.50
233
1.13
1,394
1.18
1,571
1.19
1,677
Shareholders' funds
11.8
14,941
Total AIBL
11.6
147,188
4.6
15,688
4.6
153,925
8.1
16,722
7.9
166,040
Key ratios
Net interest spread
1.30
1.47
1.57
NIM
1.41
1.54
1.65
HKD LDR
90.6
88.9
88.4
RMB LDR
31.2
46.2
49.2
Gross LDR
80.9
80.9
80.9
Sources: Dah Sing Bank; BNP Paribas estimates
8
BNP PARIBAS
20 SEPTEMBER 2012
Dah Sing Financial
Frank Yuen, CFA
BOCQ – a winning investment
DSB has overseas operations in China – via BOCQ and its fully owned subsidiary, DSB (China) – and
Macau – via Banco Comercial de Macau (BCM). BOCQ is a major overseas revenue contributor.
DSB completed the acquisition of BOCQ in April 2007, at a cost of RMB694m (HKD703m). In 2008, DSB
increased its stake in BOCQ from 17% to 20%. The investment has proven to be a success, with BOCQ
contributing 27% of DSB’s PBT in 1H12.
Three growth drivers of the Chongqing banking sector
§ Chongqing – the key beneficiary of the rebalancing growth of China
Chongqing is the largest and fastest-growing province-level municipality in southwest China, followed by
Beijing, Tianjin and Shanghai. It has a population of more than 32m and a comparatively low proportion of
urban population, at 51.6%. The GDP per capita is also lower than that of the other three coastal
municipalities, which are under the direct control of the central government. Chongqing‘s GDP per capita is
RMB27,472, below the national average of RMB29,943.
Urbanization and industrialization have been pushing the growth in Chongqing. As it is an industrial hub in
western China, Chongqing has a well-developed manufacturing industry base, which has attracted a strong
flow of foreign direct investment and fixed asset investment (FAI). During 2007-09, Chongqing’s nominal
GDP grew at a CAGR of 25%, outpacing the national growth rate of 15%.
Sources: NBS; Wind
Dec-11
Dec-10
Dec-09
Dec-08
Dec-07
Dec-06
Chongqing FAI
Dec-05
Dec-04
Dec-03
Dec-02
Dec-01
0
National FAI
Dec-99
%
Dec-99
5
(%)
50
45
40
35
30
25
20
15
10
5
0
Dec-11
10
%
Dec-10
15
%
Dec-09
%
Dec-08
20
Dec-07
25
%
Dec-06
30
%
Dec-05
%
Dec-04
35
Dec-03
40
%
Chongqing GDP
%
%
%
%
%
%
%
%
%
%
%
Dec-02
%
PRC GDP
Dec-01
(y-y %)
45
Dec-00
%
EXHIBIT 14: FAI-led economic growth
Dec-00
EXHIBIT 13: Nominal GDP growth
Sources: NBS; Wind
§ Underpenetrated banking sector
Among the four directly administered municipalities of Chongqing, Beijing, Tianjin and Shanghai, the
banking industry in Chongqing is the most underdeveloped, with both loan and deposit penetration lagging
those of the other key municipalities in China. The deposit penetration rate of 161% in Chongqing is
abnormally low, compared to 468% and 303% for Beijing and Shanghai. Chongqing has a low proportion of
urban population (52%). So, a rapid urbanization trend as stipulated in the ‘Go West’ policy would be a key
driver for the growth of the banking sector.
Loans and deposits in Chongqing expanded at a CAGR of 27% and 25% during 2007-11, outgrowing the
national growth rate of 20% for both. The Chongqing municipal government expects that the financial
industry would contribute 12% to Chongqing’s GDP by 2015.
9
BNP PARIBAS
20 SEPTEMBER 2012
Dah Sing Financial
Frank Yuen, CFA
EXHIBIT 15: Urbanization trend would push Chongqing’s banking penetration higher
National
Chongqing
Beijing
Shanghai
Tianjin
Loans % GDP – FY11 (%)
116
132
248
194
142
Deposit % GDP – FY11 (%)
172
161
468
303
157
Urban population – FY09 (%)
48
52
85
77
78
GDP per capita - FY10 (RMB)
29,943
27,472
71,935
74,537
71,012
Sources: NBS; Wind
EXHIBIT 16: Deposit growth in Chongqing vs national average
%
(%)
40
%
EXHIBIT 17: Loan growth in Chongqing vs national average
%
(%)
45
35
%
40
%
30
%
35
%
25
%
30
%
25
%
20
%
15
%
10
%
20
%
15
%
10
National
Chongqing
Beijing
Shanghai
%
5
%
5
%
0
%
0
Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11
Sources: NBS; Wind
National
Chongqing
Beijing
Shanghai
Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11
Sources: NBS; Wind
§ Favourable government policy remains unchanged
Zhang Dejiang, a high-ranking government official (as a candidate of the Central Politburo), took up the role
of the party chief of Chongqing. This implies that policies for the development in Chongqing should remain
intact. Zhang has headed two provinces before – Zhejiang (1998-02) and Guangdong (2002-08) – and won
accolades for driving the provincial growth higher than the industry average. We expect Zhang’s focused
approach would support rapid growth in Chongqing, helped by the urbanization and industrialization in the
province.
The appointment of Zhang also implies that development in Chongqing and the implementation of the ‘Go
West’ policy would remain high priorities of the central government.
EXHIBIT 18: Summary of key favourable polices
Policies
Details
November 2008 – special tax-free port
area
The first inland special tax-free port in China. Enterprises operating within the special taxfree port area enjoy preferential policies and exemptions, such as value-added tax and
consumer tax on raw materials and trade of their goods.
June 2010 – Liangjiang special
economic zone
The third sub-provincial special economic zone in China after Pudong in Shanghai and
Binhai in Tianjin. The economic zone would serve as a base for advanced manufacturing and
modern services industries, and the development of a financial centre in the upper reaches
of the Yangtze River.
2012 – Chengdu-Chongqing economic
area
The construction of the key place for the West Development. The policy aims to strengthen
the connection between Chengdu and Chongqing, and attract investment to fuel the
urbanization and industrialization of the municipality
Sources: Chongqing Municipal Government; BNP Paribas estimate
A small bank in a big pond
In Chongqing, banking institutions are generally divided into six broad categories: the large commercial
banks, the other national commercial banks, city commercial banks, rural financial institutions, foreigninvested banks and other banking institutions. Banking assets in Chongqing are still more concentrated in
the rural financial institutions for its large rural population. While city commercial banks are still confined
to a relatively small market share (c.8% of total banking assets), we expect their growth potential to be
huge, given expanding urban areas and populations.
10
BNP PARIBAS
20 SEPTEMBER 2012
Dah Sing Financial
Frank Yuen, CFA
EXHIBIT 19: Banking institutions in Chongqing
Number
Large commercial banks
Total assets
5
Mkt share
Equity
Mkt share
Net profit
(RMB b)
(%)
610
42.7
Mkt share
(RMB b)
(%)
(RMB b)
(%)
7.7
20.2
8.5
48.6
Other national commercial banks
9
289
20.2
5.1
13.4
3.3
18.9
City commercial banks
2
105
7.4
6.5
17.1
1.2
6.9
Rural financial institutions
7
202
14.1
10.1
26.5
1.2
6.9
Foreign-invested banks
8
8
0.6
1.0
2.6
0.0
0.0
Other banking institutions
9
214
15.0
7.7
20.2
3.3
18.9
40
1,428
100.0
38.1
100.0
17.5
100.0
Total
Note: Data as of FY09
Sources: Listing prospectus of Chongqing Rural Commercial Bank; CBRC Chongqing
EXHIBIT 20: A small bank in a big pond – BOCQ vs Chongqing Rural Commercial Bank
Outlets
Chongqing Rural Commercial Bank
Bank of Chongqing
Deposit
Market share
Loans
Market share
(RMB b)
(%)
(RMB b)
(%)
1,460
246
18.1
139
12.6
90
74
5.4
52
4.7
1,361
Chongqing total
1,100
Sources: CRCB; BOCB
Although BOCQ is a small bank in Chongqing, it is one of the two dominant city commercial banks, with a
5% share of loans. Regulations set by the China Banking Regulatory Commission (CBRC) allow city
commercial banks to engage in commercial banking activities within specific geographic areas. BOCQ
operates 90 branches in Chongqing and six in Sichuan and Guizhou.
BOCQ’s main business operations are in Chongqing – c.80% of its loans have been issued in Chongqing and
c.10% in Sichuan, a neighbouring province. Riding on the industrialization wave, c.20% and 12% of loans are
extended to manufacturing and utilities sectors.
EXHIBIT 21: Loan mix by sector FY11
Others
26.9%
EXHIBIT 22: Loan mix by region FY11
Manufacturing
19.5%
Others
6.5%
Guizhou
0.7%
Sichuan
9.9%
Finance
7.7%
Mining
3.1%
Utilities
12.0%
Transport
2.8%
Construction
6.4%
Real estate
6.1%
Source: Bank of Chongqing
11
Shannxi
3.4%
Wholesale and
retail
8.5%
Leasing &
business
services
7.0%
Chongqing
79.4%
Source: Bank of Chongqing
BNP PARIBAS
20 SEPTEMBER 2012
Dah Sing Financial
Frank Yuen, CFA
EXHIBIT 23: NPL ratio: BOCQ vs. industry level
(%)
%
6.0
%
5.0
%
4.0
%
3.0
%
2.0
%
1.0
%
0.0
National NPL ratio
BOCQ NPL ratio
4.85
1.85
1.24
1.08
0.79
2007
0.90
0.48
2008
0.36
2009
2010
Sources: NBS; Bank of Chongqing
EXHIBIT 24: Comparison of BOCQ with other key city commercial banks (FY11)
Banks
Municipality/Province
Bank of
Beijing
Bank of
Tianjin
Bank of
Hangzhou
Bank of
Dalian
Bank of
Shanghai
Bank of
Chongqing
Bank of
Jiangsu
Beijing
Tianjin
Zhejiang
Liaoning
Shanghai
Chongqing
Jiangsu
Listed in
Shanghai
No listing plan
Pending approval
from CSRC*
Pending approval
from CSRC
Pending approval
from CSRC
Pending approval
from CSRC
Pending approval
from CSRC
Total asset (RMB b)
956
235
244
188
656
127
514
Total equity (RMB b)
50
14
14
9
35
6
28
8.95
2.12
2.69
1.72
5.81
1.46
5.83
Listing status
Net profit
Capital position (%)
Loans – 4 yrs CAGR
27
24
31
21
22
28
29
9.59
10.24
8.80
8.19
8.74
9.26
8.54
12.06
11.33
11.67
11.57
11.75
11.96
11.66
NIM
2.27
2.38
2.73
2.80
2.25
2.86
2.84
NII% Revenue
9.44
7.08
11.63
10.95
6.74
6.73
22.07
CIR
26.4
10.2
31.9
37.1
38.0
39.97
29.6
Core capital ratio
Total CAR
Profitability (%)
ROA
0.94
0.90
1.10
0.92
0.89
1.15
1.13
ROE
17.76
14.86
18.71
19.03
16.53
22.91
20.98
19.0
16.5
16.9
20.8
18.7
19.9
18.5
Deposit
614
165
171
136
467
89
434
Loans
406
96
119
86
335
63
291
NPL ratio (%)
0.53
0.93
n.a
0.98
0.98
0.36
0.78
66
58
69
63
72
71
67
2.37
3.25
1.68
2.86
2.71
1.90
2.36
Asset/equities (x)
Balance sheet (RMB b)
LDR (%)
LLR % loans
* CSRC = China Securities Regulatory Commission
Sources: Companies’ financial statement; Wind; BNP Paribas estimates
12
BNP PARIBAS
20 SEPTEMBER 2012
Dah Sing Financial
Frank Yuen, CFA
EXHIBIT 25: BOCQ – NIM leader – FY11
EXHIBIT 26: BOCQ has a mid-level core capital position – FY11
(%)
2.86
10.5
2.84
2.80
10.0
2.73
2.8
10.24
9.59
9.26
9.5
2.6
8.80
9.0
2.38
2.4
2.27
2.25
2.2
8.54
8.19
8.0
7.5
Sources: Companies; Bank of Chongqing; Wind
Sources: Companies; Bank of Chongqing; Wind
EXHIBIT 27: Low share of loan loss reserves % loans, risk of a hike
in credit cost – FY11
EXHIBIT 28: LDR – FY11
(%)
1.2
NPL ratio (RHS)
3.25
(%)
% 75
72
71
2.71
Bank of
Tianjin
Bank of
Shanghai
% 50
Bank of
Hangzhou
Bank of
Chongqing
Bank of
Jiangsu
(0.3)
Bank of
Beijing
1.5
Bank of
Shanghai
Bank of
Dalian
% 55
1.68
Bank of
Dalian
58
% 60
0.2
1.90
Bank of
Tianjin
63
% 65
2.36
2.0
Sources: Bank of Chongqing; Wind
66
Bank of
Dalian
2.37
67
Bank of
Beijing
2.5
0.7
Bank of
Hangzhou
2.86
Bank of
Chongqing
3.0
Bank of
Jiangsu
69
% 70
Bank of
Jiangsu
LLR loans (LHS)
Bank of
Shanghai
Bank of
Chongqing
Bank of
Beijing
Bank of
Shanghai
Bank of
Beijing
Bank of
Tianjin
Bank of
Hangzhou
Bank of
Dalian
Bank of
Jiangsu
Bank of
Chongqing
Bank of
Tianjin
7.0
2.0
(%)
3.5
8.74
8.5
Bank of
Hangzhou
3.0
(%)
Sources: Bank of Chongqing; Wind
BOCQ – SWOT analysis
Strengths
§ BOCQ has shown strong leadership in NIM, as compared to other city commercial banks. We believe
BOCQ enjoys a higher pricing power in Chongqing owing to an underpenetrated banking system in the
province. Bank loans as a percentage of GDP are only 132%, far below that in more developed cities
with more developed banking systems. BOCQ’s average lending rate was 6.92% in FY11, thanks to the
higher-yield short-term personal loans and corporate loans, which accounted for 41% of BOCQ’s total
loans. These loans are normally priced at 25% above the benchmark rate, at c.7.5-8.0%
§
13
Compared to other key city commercial banks, BOCQ’s higher CASA funding base has helped the bank
secure stable and cheaper funding.
BNP PARIBAS
20 SEPTEMBER 2012
Dah Sing Financial
Frank Yuen, CFA
EXHIBIT 29: Average yield by loan type – FY11
(%)
60
%
Loan mix (LHS)
7.5
%
EXHIBIT 30: High CASA funding base – FY11
Avg annualized yield (RHS)
7.46
(bps)
8
7.07
50
7
5.79
%
40
%
30
%
4
3
%
37
10
%
0
%
50
%
40
%
30
%
20
%
10
54
53
43
36
2
15
1
4
0
Personal loans Coporate
Coporate Personal loans
(<= year) loans (<= 1 yr) loans (> 1yr)
(> 1yr)
Sources: Bank of Chongqing; Wind
§
33
(%)
60
6
5
20
%
%
0
Bank of
Chongqing
Bank of Dalian
Bank of
Shanghai
Bank of Tianjin
Sources: Bank of Chongqing; Wind
Although the Chinese economy is slowing down, we believe credit demand will remain strong in
Chongqing, driven by urbanization, industrialization, and the central government’s intent to direct
growth to the inland regions in western China.
Weaknesses
§ The undeveloped fee income channel makes the bank vulnerable to any rate deregulation. Non-interest
income comprised only c.6.7% of total revenue as of FY11. Its high reliance on interest income would
put the bank at a disadvantage if rates are further deregulated.
§
The geographical reach of city commercial banks in China is restricted. Geographical restrictions would
impede growth opportunities and heighten the concentration risk for such banks’ loan portfolios.
§
The suspension of domestic listing of city commercial banks by the CSRC restricts the sources of capital
for BOCQ. BOCQ’s core capital ratio stands at 9.26%, around the mid-point of the core capital ratio of the
key major city commercial banks. However, we believe BOCQ’s capital consumption will remain high to
fuel its higher-than-industry average loans growth.
Opportunities
§ The central government’s intention to spur and rebalance growth in the western part of China should
continue to fuel growth in the Chongqing province and boost its underdeveloped banking sector.
§
The rapid urbanization trend in Chongqing should bring forth tremendous growth opportunities.
Banking assets in Chongqing are still highly concentrated in rural financial institutions. With the
increase in urban population, we would expect huge business opportunities for city commercial banks.
§
There is the potential to establish branches in provinces other than Chongqing, Sichuan and Guizhou.
§
The bank could see improved cost efficiency due to upscaling and better fee income owing to new
product launches.
Threats
§ The share of loans as a percentage of provisions stood at 1.9%, below that of other key city commercial
banks and still far from meeting the 2.5% requirement set by the CBRC. BOCQ may have to slow down its
loan growth and increase provisions in the coming years in order to meet the CBRC requirement.
§
State-owned enterprises have a c.36% stake in BOCQ. Its loan exposure to state-owned enterprises
would impose significant counterparty risk on the bank.
§
With a business model highly tied to Chongqing, the bank is vulnerable to any economic slowdown in
the province.
14
BNP PARIBAS
20 SEPTEMBER 2012
Dah Sing Financial
Frank Yuen, CFA
EXHIBIT 31: BOCQ loan market share expanded with urbanization
%
(%)
56
%
54
%
52
%
50
%
48
%
46
%
44
4.2 %
%
42
4.1 %
Urban population (LHS)
BOCQ loans share in Chongqing (RHS)
(%)
4.9 %
4.8 %
4.7 %
4.6 %
4.5 %
4.4 %
4.3 %
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Sources: NBS; Wind
BOCQ – financial analysis and projection
Although strong fundamental factors support the long-term growth of BOCQ, we take a conservative stance
in our projections, due to the risk of a slowing economy and interest rate deregulation. We factor the risk of
NIM contraction and credit cost hike into our forecasts.
We forecast BOCQ will continue to deliver strong loan and deposit growth of 12-14% and 15%, respectively,
during FY12-15E, riding on the urbanization trend and an underpenetrated banking sector in Chongqing.
Thus, we see net interest income will grow 10-16% through FY13-15E, notwithstanding the headwinds of a
NIM deregulation. On the back of a strong fee income growth of 35-40% through 2013-15E, we forecast the
bank to deliver revenue growth of 18-19% in the coming three years.
The higher provision charge needed to meet the CBRC’s 2.5% LLR % loans requirement would be the main
drag on BOCQ’s profitability. We expect BOCQ would gradually raise the credit cost to meet the target ratio
by 2016. Therefore, we forecast the credit cost to rise 33% in 2012E and 20-25% during 2013E-15E. We
expect that its LLR % loans would reach 2.44% by 2015E.
BOCQ has achieved an ROE of 22-26% in the past five years, riding on a strong NIM and benign credit costs.
From 2013E, we project the ROE will slip to the range of 17-19%, dragged by a narrower NIM and higher
credit costs. We expect NIM to decline 13bps in 2012E, when the effect of the rate cut starts to kick in. In
addition, BOCQ is going to add up its provision costs in order to meet the 2.5% LLR loan requirement set by
the CBRC by 2016. We forecast credit cost to glide up to 0.20% of average loans in FY14E, from 0.16% in
2011.
15
BNP PARIBAS
20 SEPTEMBER 2012
Dah Sing Financial
Frank Yuen, CFA
EXHIBIT 32: BOCQ – profit & loss account forecasts
Income statement
2011
2012E
2013E
2014E
2015E
2011
2012E
2013E
2014E
2015E
(RMB m)
(RMB m)
(RMB m)
(RMB m)
(RMB m)
(%)
(%)
(%)
(%)
(%)
Interest income
Interest expense
Net interest income
9,355
10,468
11,768
13,658
15,909
102
12
12
16
16
(6,070)
(6,871)
(7,616)
(8,855)
(10,338)
188
13
11
16
17
3,285
3,597
4,151
4,802
5,571
30
10
15
16
16
Fee and commission income
328
476
667
900
1,215
44
45
40
35
35
35
Fee and commission expense
(39)
(56)
(78)
(106)
(143)
32
45
40
35
Net fee and commission income
290
420
588
794
1,072
46
45
40
35
35
Non-interest income
237
430
619
835
1,124
12
81
44
35
35
3,522
4,027
4,770
5,638
6,695
29
14
18
18
19
Revenue
Business tax and surcharges
Operating and administrative expenses
Others
Total expense
PPOP
(225)
(242)
(286)
(338)
(402)
38
7
18
18
19
(1,214)
(1,578)
(2,004)
(2,505)
(3,056)
31
30
27
25
22
(0.4)
(0.5)
(0.5)
(0.6)
(0.6)
(41)
10
10
10
10
(1,440)
(1,820)
(2,291)
(2,844)
(3,458)
32
26
26
24
22
2,082
2,207
2,479
2,794
3,237
27
6
12
13
16
20
Provision
(184)
(245)
(298)
(371)
(446)
(29)
33
21
25
Operating profit after impairment
1,898
1,962
2,182
2,422
2,791
38
3
11
11
15
5
5.7
6.3
6.9
7.6
(46)
10
10
10
10
Profit before tax
1,903
1,967
2,188
2,429
2,799
37
3
11
11
15
Tax
(440)
(452)
(503)
(558)
(643)
44
3
11
11
15
23
23
23
23%
23%
Net profit
1,463
1,515
1,685
1,871
2,155
35
4
11
11
15
EPS (RMB)
0.72
0.75
0.83
0.92
1.06
33
4
11
11
15
Non-operating income
Effective tax rate (%)
Sources: Bank of Chongqing; BNP Paribas estimates
EXHIBIT 33: BOCQ – balance sheet forecasts
Balance sheet
Cash and balance with central banks
Interbank lending
Customer advances
2011
2012E
2013E
2014E
2015E
2011
2012E
2013E
2014E
2015E
(RMB m)
(RMB m)
(RMB m)
(RMB m)
(RMB m)
(%)
(%)
(%)
(%)
(%)
25,036
28,791
33,110
38,077
43,788
47
15
15
15
15
3,975
6,070
10,221
17,048
26,360
650
53
68
67
55
63,149
73,194
83,442
93,455
104,669
21
16
14
12
12
Investment securities
16,904
19,439
22,355
25,708
29,565
(19)
15
15
15
15
Reverse REPO
14,669
16,870
19,400
22,310
25,656
(6)
15
15
15
15
1,615
1,800
1,800
1,800
1,800
289
11
0
0
0
211
221
232
244
256
3
5
5
5
5
Trading securities
Goodwill and intangibles
Fixed asset
795
914
1,052
1,209
1,391
44
15
15
15
15
Deferred tax asset
167
183
202
222
244
5
10
10
10
10
Investment in associates
206
226
249
274
301
12
10
10
10
10
Others
491
589
707
849
1,018
(1)
20
20
20
20
127,217
148,299
172,770
201,195
235,049
18
17
17
16
17
692
837
1,004
1,195
2,151
42
21
20
19
80
Interbank borrowing
13,080
15,696
18,835
22,603
27,123
(6)
20
20
20
20
REPO
14,674
17,608
21,130
25,356
30,427
19
20
20
20
20
Customer deposit
89,307
102,703
118,108
135,824
156,198
21
15
15
15
15
0
0
0
0
0
Total Asset
Borrowings from central banks
Derivative liabilities
Interest payable
649
779
934
1,121
1,346
96
20
20
20
20
Bond payable
995
1,044
1,097
1,151
1,209
0
5
5
5
5
20
Other payable
Others
Total Liabilities
Total shareholders' equity
296
356
427
512
615
29
20
20
20
1,137
1,364
1,637
1,965
2,358
14
20
20
20
20
120,829
140,387
163,173
189,728
221,426
17
16
16
16
17
6,388
7,912
9,597
11,467
13,622
28
24
21
19
19
Sources: Bank of Chongqing; BNP Paribas estimates
16
BNP PARIBAS
20 SEPTEMBER 2012
Dah Sing Financial
Frank Yuen, CFA
EXHIBIT 34: ROE Du Pont analysis – BOCQ
% per avg. asset
2007
2008
2009
2010
2011
2012E
2013E
2014E
2015E
(%)
(%)
(%)
(%)
(%)
(%)
(%)
(%)
(%)
Net INC
3.35
3.61
2.82
2.66
2.79
2.61
2.59
2.57
2.55
Non INC
0.67
0.18
0.23
0.22
0.20
0.31
0.39
0.45
0.52
Revenue
Cost
PPOP
4.02
3.79
3.05
2.89
2.99
2.92
2.97
3.02
3.07
(1.56)
(1.62)
(1.31)
(1.15)
(1.22)
(1.32)
(1.43)
(1.52)
(1.59)
2.46
2.16
1.74
1.73
1.77
1.60
1.54
1.49
1.48
(0.21)
(0.45)
(0.13)
(0.27)
(0.16)
(0.18)
(0.19)
(0.20)
(0.20)
Others
0.02
(0.03)
0.02
0.01
0.00
0.00
0.00
0.00
0.00
Pretax ROAA
2.27
1.69
1.64
1.47
1.62
1.43
1.36
1.30
1.28
(0.82)
(0.39)
(0.36)
(0.32)
(0.37)
(0.33)
(0.31)
(0.30)
(0.30)
1.44
1.30
1.28
1.15
1.24
1.10
1.05
1.00
0.99
Credit cost
Tax
ROAA
Asset/equity
ROAE
16.1
17.1
18.7
20.9
20.7
19.3
18.3
17.8
17.4
23.18
22.13
23.91
23.99
25.72
21.19
19.25
17.76
17.18
345
371
289
271
286
273
271
270
271
17
5
8
8
7
11
13
15
17
Key ratios
NIM (bp)
Non INC % revenue
CIR
NPL ratio
LLR % loans
39
43
43
40
41
45
48
50
51
1.08
0.79
0.48
0.36
0.36
0.40
0.45
0.50
0.55
1.94
2.38
1.83
1.94
1.90
1.98
2.09
2.26
2.44
Deposit growth (y-y %)
22.61
19.57
40.25
24.66
20.92
15.00
15.00
15.00
15.00
Loan growth (y-y %)
25.66
20.86
47.54
25.87
20.91
15.91
14.00
12.00
12.00
Sources: Bank of Chongqing; BNP Paribas estimates
17
BNP PARIBAS
20 SEPTEMBER 2012
Dah Sing Financial
Frank Yuen, CFA
Dah Sing Life
Hong Kong life sector – bancassurance accounts for 47% of the market
After the global financial crisis in 2008, bank-affiliated insurers have grown their market shares rapidly, to
47% in FY11 from 28% in FY07. This was probably because banks started to devote more resources to these
relatively new ‘wealth management’ (bancassurance) products when capital requirements on other risky
products turned more stringent. Furthermore, the slowdown of the big agency-led insurers, which used to
dominate the market, has made the rise of bancassurance more apparent.
In Hong Kong, the major bank-affiliated insurers are HSBC Insurance (19% market share), BOC Group Life
(17%), and Hang Seng Insurance (6%). These firms enjoy a great advantage in the form of their extensive
branch network and large pool of bank customers. Big agency-led insurers such as AIA, Manulife, and AXA
also strived for a strong recovery after the 2008 crisis. As such, we expect competition in the Hong Kong life
insurance market to intensify.
Bank-affiliated insurers have outperformed the agency-led insurers since 2007, with a sharp growth rate of
60%. Dah Sing Life (DSL) has outperformed the market with a 120% growth rate, benefiting from an
expanded agency force, better bancassurance performance, and higher demand for wealth management
products. However, the more intense competition and high agency turnover since 2007 have sharply slowed
down the premium growth for DSL.
EXHIBIT 35: Market shares FY11 (by annualized new business)
BEA Life
1%
Others
14%
AIA
9%
Dah Sing Life
1%
(%)
AXA
7%
Manulife
(Int'l)
4%
Prudential
(UK)
10%
BOC Group
Life
17%
China Life
8%
HSBC
19%
Hang Seng Ins. 6%
Source: OCI
EXHIBIT 36: Bank-affiliated insurers led the growth since GFC
ING Life
3%
Hong Kong
Life
1%
%
140
%
120
%
100
%
80
%
60
%
40
%
20
%
Industry
Bancassurance
Agency-led insurer
Dah Sing Life
0
%
(20)
%
(40)
2006
2007
2008
2009
2010
2011
Source: OCI
DSL: agency business limited by scale
DSL is a small player in Hong Kong, with a market share of 0.7% (by sum assured) in 1Q12. Unlike other
Hong Kong banks, DSL has its own agency force of about 500 agents to sell products with higher protection
value. However, the firm has suffered from a high agency turnover in recent years. When competing with
other big agency-led insurers, DSL is limited by its smaller scale and weaker brand recognition. From the
perspective of underwriting, a smaller pool of insured would imply higher underwriting risk and entail
higher risk margin priced in the products. This would inevitably reduce the competitiveness of DSL’s
products compared to those of other bigger insurers. In all, we believe DSL’s agency premium growth
momentum would remain constrained.
More bancassurance is a positive change
We believe the shift in DSL’s focus from agency to bancassurance is a positive change. The firm decided to
recruit more financial planners in 2012 to enhance its distribution channels for bancassurance. While
running an agency force could allow the Group to distribute higher-margin products, we think the cost and
management focus devoted is too high and not sustainable at this scale. Despite the potentially lower
margin and shorter duration nature of bancassurance, it could better leverage Dah Sing Bank’s core
competence (50-branch network) and create stronger potential for premium growth. After a higher reliance
on bancassurance products in FY09, DSL still showed a robust 7.5%/36% value of in-force growth in
FY10/11.
18
BNP PARIBAS
20 SEPTEMBER 2012
Dah Sing Financial
Frank Yuen, CFA
Bancassurance product comparison
Exhibit 37 summarises the key features of the savings-type insurance products distributed by key bankaffiliated insurers. We notice that the payment term of the policies is usually short of two to three years,
with policy terms spanning from five to eight years. These products usually focus on savings elements,
which offer maturity benefit and accumulated dividends to policyholders. Maturity benefit is usually
defined as the total premium paid plus a non-guaranteed interest return. Policy dividends are subject to the
financial performance of the life insurance operations.
On the protection front, the coverage is fairly limited, with death benefit of 101-102% of total premium
paid. Most products’ protection features are enhanced by additional accidental death benefit, but they are
kept low at 30-50% of premium paid and capped by a maximum amount. Since the protection element is
small, banks face small underwriting risk. Most products, thus, are sold with guaranteed acceptance, which
would require no medical underwriting and check-up before application. We believe this is designed in such
a way to facilitate efficient distribution of insurance products at bank branches.
EXHIBIT 37: Key bancassurance comparison
Dah Sing Life
BOC Group Life
Hang Seng Insurance
Product type
DSL Happy Saver
Target 5-Year Insurance Plan
Series
Target Income Life Insurance Plan
Payment term (yr)
3
2
Single premium/3-15
Policy term (yr)
8
5
8/10/15/20
Policy currency
USD
HKD/USD/RMB
HKD/USD
Savings benefit
1) Maturity benefit
2) Non-guaranteed dividend and
interest return
1) Maturity benefit
2) Non-guaranteed dividend and
interest return
1) Monthly/Annual payment or
one-off maturity benefit
3) Non-guaranteed dividend and
interest return
Protection benefit
1) Death benefit of 101% of
premium paid plus accumulated
dividends
1) Death benefit of 102% of
premium paid plus accumulated
dividends
1) Death benefit of 101% of
premium paid plus accumulated
dividends
2) Accidental death benefit of 50%
of premium paid (for first eight
policy years with a cap of
HKD200K/USD25K per life
2) Accidental death benefit of 30%
of premium paid (for first three
policy years with a cap of
HKD200K/USD25K/RMB200K per
life
2) Accidental death benefit of 30%
of premium paid
Guaranteed
acceptance:
requires no medical
underwriting and
check-up prior to
application
Yes
Yes
Yes
Other features
1) Critical illness benefit
2) Optional waiver of premium on
disability
1) 24-hr worldwide emergency
assistance services
2) Flexible premium contributions
after the first year
1) Terminal illness benefit
2) Optional waiver of premium on
disability
Source: Dah Sing Life; Companies data; BNP Paribas
EXHIBIT 38: Life premium mix as of 1H12
EXHIBIT 39: Market shares remained small
(%)
1.6
Others
3.0%
1.4
Agent
26.0%
1.2
1.0
0.8
0.6
0.4
Bancassurance
71.0%
0.2
0.0
Agents
Sources: Dah Sing Financial; BNP Paribas
19
No. of policies
Sum assured
Source: HKOCI
BNP PARIBAS
20 SEPTEMBER 2012
Dah Sing Financial
Frank Yuen, CFA
Investment book largely de-risked
The investment environment could remain difficult in a flat-yield-curve environment. While a lower
interest rate would lead to a higher fair-value change in the bond portfolio, it would largely be offset by a
higher actuarial reserve required, due to a lower-valuation interest rate. As of 1H12, DSL has an investment
book of HKD10.84b, with 83% invested in cash equivalents and bonds.
In 1H12, DSL delivered a strong investment return of 7% due to mark-to-market gains on its bond portfolio.
A decline in rates contributed to this gain, as the 10-year UST tumbled another 36bp to 1.62% in 1H12.
However, the lower rates of the US and HK government papers (five-year UST: 0.62%, five-year EFBN: 0.27%
as of July 2012) would continue to compress the recurring interest income. On a positive note, we see DSL
has been taking up exposure on high-grade corporate bonds to enhance investment return. The spread
between the Baa corporate bond and 10Y UST widened slightly to 2% in June 2012.
Equity investment accounted for 23% of DSL’s investment portfolio. The MSCI Asia ex-Japan index
strengthened 4.5% in 1H12 and 3.2% in 3Q12. We expect the positive mark-to-market gain in its equity
portfolio to partly offset the low yield of its fixed-income portfolio. In all, we expect DSL’s investment to
slightly trend down to a 4% level in FY13E/14E.
EXHIBIT 40: Dah Sing Life investment return
%
EXHIBIT 41: Minimal return on HKD/USD government papers
(%)
(%)
10.0
12
%
8.0
%
6.0
%
4.0
%
2.0
%
0.0
8.2
5.9
2Y US treasury
5Y US treasury
5Y exchange funds
10
5.6
4.4
4.1
2Y exchange funds
8
6
4
% (2.0)
2
% (4.0)
% (6.0)
(4.1)
2008
0
2009
2010
2011
2012E
1998
2013E
2000
2002
2004
2006
2008
2010
2012
Sources: Dah Sing Life; BNP Paribas estimates
Source: HKMA
EXHIBIT 42: MSCI Asia Index
EXHIBIT 43: Corporate spread: Moody’s Baa over 10-year UST
(index)
(%)
600
3.0
550
2.5
500
450
2.0
400
1.5
350
300
1.0
250
0.5
200
150
Jun 08
Source: Bloomberg
20
0.0
Jun 09
Jun 10
Jun 11
Jun 12
92
94
96
98
00
02
04
06
08
10
12
Sources: CEIC; Moody’s
BNP PARIBAS
20 SEPTEMBER 2012
Dah Sing Financial
Frank Yuen, CFA
EXHIBIT 44: Credit rating of its bond portfolio – 1H12
Lower than
A16.7%
Unrated
3.5%
EXHIBIT 45: Investment mix – 1H12
AAA
10.9%
Equity listed
outside HK
12.3%
Equity unlisted
7.6%
Debt - listed
in HK
10.8%
AA- to AA+
15.8%
Equity listed in HK
3.4%
Debt - listed
outside HK
36.9%
Debt unlisted
29.0%
A- to A+
53.1%
Source: Dah Sing Financial
Source: Dah Sing Financial
Financial analysis: insurance contribution – a steady profit stream
Dah Sing’s insurance business has been a stable source of profit for the group since 2009. It currently
accounts for c.20% of the group profit. In FY11, strong new business growth (53% y-y) and a lower valuation
rate drove the value of in-force to rebound by 36% y-y. In 1H12, net insurance premium retreated 7% y-y,
but a further decline in the valuation rate drove the value of in-force to grow 6.5% h-h. The lower valuation
rate, however, also increased the required actuarial reserves, which offset the positive MTM investment
gain and led to flat bottom-line growth.
We forecast net premium to grow 7% through FY13-15E – We note that the strong growth in RMB policies
in 1H12 was not captured in net premiums, as DSL has to reinsure all its RMB policies in the absence of
long-term RMB assets. We expect DSL to gradually develop underwriting capability for RMB policies to
boost premium growth. Moreover, after the firm shifts its focus to bancassurance, we expect the premium
growth to be more stable and less affected by agency turnover.
We forecast positive underwriting results in FY13-15E – DSL has recorded underwriting losses since 2010,
as the valuation interest rate continues to trend down, which led to a higher reserve requirement. We
expect positive underwriting results through 2013-15E, as BNP Paribas expects the long-term US rate (10year UST) to start picking up in 1Q13. Even if the rate declines, a positive fair-value change in its fixedincome securities would partly offset the increase in reserve requirement.
We expect the embedded value to grow 7% through 2012-15E, primarily driven by the 10-12% value of inforce growth from both agency and bancassurance products.
21
BNP PARIBAS
20 SEPTEMBER 2012
Dah Sing Financial
Frank Yuen, CFA
EXHIBIT 46: Contribution from DSL – a steady profit contributor
Year-ended 31 Dec
Net premium income
Increase of value of in-force
Claims and expenses
Insurance underwriting
2009
2010
2011
2012E
2013E
2014E
2015E
(HKD m)
(HKD m)
(HKD m)
(HKD m)
(HKD m)
(HKD m)
(HKD m)
1,510
1,548
1,572
1,556
1,665
1,782
1,907
(49)
93
469
220
195
210
227
(1,407)
(1,921)
(2,106)
(1,865)
(1,823)
(1,932)
(2,048)
54
(276)
(62)
(89)
37
60
85
Claims ratio (%)
(96)
(117)
(103)
(105)
(98)
(97)
(96)
Interest income
172
221
264
324
363
420
483
Dealing profit
183
496
202
300
220
240
250
Disposal of AFS securities
(35)
21
103
5
0
0
0
27
18
20
20
20
20
20
Others
Operating profit
Operating expenses and other costs
CIR (%)
401
480
527
560
640
740
838
(147)
(150)
(182)
(196)
(224)
(259)
(293)
37
31
35
35
35
35
35
PBT
254
330
345
364
416
481
545
Taxation
(13)
(16)
(17)
(18)
(21)
(24)
(27)
Net profit
Change (y-y %)
241
314
328
346
395
457
518
(7.8)
30.3
4.5
5.5
14.2
15.6
13.4
1,226
1,318
1,787
2,007
2,202
2,412
2,639
Embedded value
VIF
Change (y-y %)
(3.8)
7.5
35.6
12.3
9.7
9.5
9.4
ANW
1,575
1,744
1,501
1,540
1,580
1,623
1,668
EV
2,801
3,062
3,288
3,547
3,782
4,035
4,307
27.0
9.3
7.4
7.9
6.6
6.7
6.7
Change (y-y %)
Sources: Dah Sing Financial; BNP Paribas estimates
EXHIBIT 47: Steady growth in the value of in-force – 10-year CAGR of 12%
(HKD m)
Value of inforce (LHS)
(y-y %)
Growth (RHS)
3,000
40
%
2,500
30
%
2,000
20
%
1,500
10
%
1,000
0
500
0
2004
2005
2006
2007
2008
2009
2010
2011
2012E
2013E
2014E
%
(10)
%
(20)
%
2015E
Sources: Dah Sing Financial; BNP Paribas estimates
22
BNP PARIBAS
20 SEPTEMBER 2012
Dah Sing Financial
Frank Yuen, CFA
Valuation and risk
A deeply undervalued insurance franchise
EXHIBIT 48: Implied 0.2x FY13E P/EV for DSL
How the market values DSL
MV
Per DSFH share
(HKD m)
(HKD m)
Remarks
DSB's share price as of 18 Sep 2012
8,768
na
Total DSB shares - 1,223m
DSFH's share price as of 18 Sep 2012
7,818
26.7
Total DSF shares - 293m
DSB's MV reflected in DSFH stakes
6,532
22.3
DSF holds 74.5% stake on DSB
Fixed asset
575
2.0
MV of DSL
711
1.9
EV
3,782
12.9
Net profit
395
1.3
FY13E P/EV – DSL (x)
0.2
0.2
FY13E P/E – DSL (x)
1.8
1.8
We believe DSL is a deeply undervalued
insurance franchise. If we swipe out the
valuation of the banking arm at market
price (HKD7.2 as of 18 September) and the
fixed assets owned by Dah Sing life, the
market is only pricing its insurance
business at 0.2x FY13E P/EV or 1.8x FY13E
P/E.
Sources: Dah Sing Financial; Bloomberg; BNP Paribas estimates
Holding company discount closed slightly to 33%
We estimate the holding company discount by measuring the difference between the market value of DSB
and DSFH (74.5% stake in DSB and 1x P/EV of Dah Sing Life). The holding company discount has bottomed
out from 50% in September 2011 to 33% as of September 2012. The historical average of holding company
discount stood at 5%.
The discount widened sharply in both September 2008 and December 2010 when the bankruptcy of Lehman
Brothers and the European debt crisis hit the market. DSL reported a loss of HKD110m in 2008 due to markto-market losses in investment securities. When the European debt crisis deepened in 2010, the discount
widened again. We believe the market has derated DSL for potential investment loss. In our view, the risk of
further investment loss for DSL should largely subside on a de-risked investment book, with 80% of bond
investment having credit rating higher than A-.
EXHIBIT 49: Dah Sing Financial – holding company discount
%
(%)
40
%
30
%
20
%
10
%
0
% (10)
Historical average
% (20)
% (30)
% (40)
% (50)
% (60)
Dec-04
Feb-06
Feb-07
Feb-08
Feb-09
Feb-10
Feb-11
Feb-12
Sources: Dah Sing Financial; BNP Paribas
23
BNP PARIBAS
20 SEPTEMBER 2012
Dah Sing Financial
Frank Yuen, CFA
DSL’s implied P/EV at only 0.2x
EXHIBIT 50: DSL – Implied P/EV
(x)
4.0
3.5
3.0
2.5
2.0
1.5
Average
1.0
0.5
0.0
Jun-12
Dec-11
Jun-11
Dec-10
Jun-10
Dec-09
Jun-09
Dec-08
Jun-08
Dec-07
Jun-07
Dec-06
Jun-06
Dec-05
Jun-05
Dec-04
(0.5)
Sources: Dah Sing Financial; BNP Paribas
Our SoTP valuation points to a TP of HKD33.90
We value DSFH at HKD33.90 based on a sum-of-the-parts (SoTP) valuation of: 1) its banking arm DSB, at
0.76x FY13E P/BV based on the Gordon Growth Model pegging on a normalized ROE of 8.9% , 2) its
insurance business at 0.5x FY13E P/EV, and 3) its fixed asset worth HKD575m, or HKD2 per share. We value
Dah Sing’s insurance operations at 0.5x FY13E P/EV, at a deep discount to other Asian insurers such as AIA
(1.4x P/EV) and China Life (1.6x P/EV) due to its limited scale and bancassurance focus. In addition, we
apply a 15% holding company discount in our valuation.
EXHIBIT 51: Our SoTP valuation points to a TP of HKD33.90
MV
Per share
(HKD m)
(HKD m)
DSB 74.5% stake)
9,111
31.1
EV of DSLA
1,891
6.5
Fixed asset
575
2
(1,650)
(5.6)
9,926
33.9
Holding company discount
Total
Valuation method
TP of DSB at 74.5% stake
0.5x P/EV
We value DSF at HKD33.90 per share
based on the SoTP valuation of its banking
arm at a 0.76x FY13E P/BV (74.5% stake)
or a TP of HKD10.44, and a 0.5x FY13E
P/EV on its insurance business.
Holding company discount at 15%
Sources: Dah Sing Financial; BNP Paribas estimates
Key risks
§ A sudden asset-quality deterioration, driven by a massive economic slowdown globally, in both the
bank’s Hong Kong and mainland loans portfolios, would be the key earnings risk.
§
An unexpected deposit war driven by foreign players for market share or a fund outflow from Hong
Kong poses the greatest funding risk to DSB.
§
A potential placement risk from DSB due to capital outlay to support BOCQ growth is another key risk.
24
BNP PARIBAS
20 SEPTEMBER 2012
Dah Sing Financial
Frank Yuen, CFA
EXHIBIT 52: DSF forward P/BV band chart
(HKD)
80
1.4x
70
1.2x
60
1.0x
50
0.8x
40
0.6x
30
20
10
0
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Sources: Bloomberg; BNP Paribas
EXHIBIT 53: Valuation tables of Hong Kong and China banks
BBG code
Market
Share
cap
price
2012E
------ P/E -----2013E
2012E
------ P/BV-- --2013E
2012E
-- EPS growth -2013E
2012E
ROE
2012E
---- Div. yield --2012E
(USD m)
(HKD)
(x)
(x)
(x)
(x)
(%)
(%)
(%)
(%)
(%)
Big cap HK banks
HSBC
Hang Seng Bk
5 HK
171,711
72.60
11.3
9.1
0.97
0.90
(9.9)
23.5
9.0
4.3
4.5
11 HK
28,162
118.00
12.8
11.6
2.61
2.35
5.2
9.8
20.8
4.4
4.4
BOCHK
2388 HK
32,730
24.00
12.8
10.6
1.85
1.73
(2.9)
20.5
14.2
5.0
5.7
StanChart
2888 HK
57,494
186.50
10.4
8.8
1.23
1.11
15.5
18.4
12.3
2.9
3.4
11.8
10.0
1.66
1.52
2.0
18.1
14.1
4.1
4.5
Average
Mid-cap HK banks
BEA
Wing Hang
Dah Sing Bank
Dah Sing Financial
Chong Hing Bank
Public Bk (HK)
23 HK
7,829
29.25
10.0
8.9
1.19
1.11
13.8
12.0
12.8
4.4
5.1
302 HK
2,819
72.60
9.6
8.6
1.25
1.15
14.3
12.1
13.8
3.6
4.6
2356 HK
1,167
7.17
7.2
6.4
0.56
0.52
13.5
12.1
8.0
4.2
4.7
440 HK
1,021
26.65
7.7
6.8
0.51
0.50
13.8
13.6
7.0
3.9
4.4
1111 HK
716
12.66
9.9
8.7
0.80
0.76
17.4
12.6
8.3
4.1
4.6
626 HK
496
3.50
11.3
10.9
0.59
0.58
(9.1)
3.2
5.3
4.3
4.0
9.3
8.4
0.82
0.77
10.6
10.9
9.2
4.1
4.6
Average
China banks
ICBC
1398 HK
206,705
4.49
5.5
5.2
1.17
1.02
14.3
6.2
23.0
6.2
6.6
CCB
939 HK
166,387
5.25
5.7
5.2
1.17
1.02
13.4
8.6
22.0
6.1
6.7
CMB
3968 HK
35,296
13.12
5.2
5.8
1.17
1.19
26.3
(11.5)
24.7
5.8
5.1
BoCom
3328 HK
49,815
5.21
4.8
4.5
0.87
0.76
5.1
7.5
19.1
5.7
6.7
BOC
3988 HK
115,400
2.95
5.2
4.9
0.85
0.76
5.8
6.2
17.2
6.7
7.1
ABC
1288 HK
127,074
2.93
5.6
5.4
1.05
0.93
15.0
3.2
19.0
6.1
6.4
5.3
5.2
1.05
0.95
13.3
3.4
20.8
6.1
6.4
Average
(*), Price as of 18 September 2012
Sources: Bloomberg; BNP Paribas estimates
25
BNP PARIBAS
20 SEPTEMBER 2012
Dah Sing Financial
Frank Yuen, CFA
RISK EXPERTS l Macro BUY
DAH SING FINANCIAL
440 HK
---- Worst ----
Key Earnings Drivers & Sensitivity
------ Base ------
------ Best ------
2012E
2013E
2012E
2013E
2012E
2013E
HKD funding cost (%)
1.40
1.41
1.20
1.21
1.00
1.01
NIM (%)
1.44
1.55
1.64
1.75
1.84
1.95
A 4-5bp NIM expansion through FY13E-15E,
15E, driven by an
upward repricing of asset yield
Credit cost (bp)
0.23
0.36
0.13
0.26
0.03
0.16
EPS(HKD)
3.74
4.27
3.92
4.45
4.10
4.64
Bank of Chongqing’s contribution rising to 32% by FY15E from
27% in FY11
EPS change (%)
(5)
(4)
na
na
5
4
12.33
13.56
A mild balance sheet expansion, with loan growth of 8% in
FY12E/13E
EPS growth (%)
We forecast credit cost to rise to 27-36bp
36bp in FY13E-15E
FY13E
Source: BNP Paribas estimates
Dah Sing Financial and HSI Index
(3M and 6M Realised-Vol)
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Regression – Dah Sing Financial to HSI Index
Sep
Sep-10
Sep-11
Hang Seng Index
Sep-12
-18.00%
-13.00%
-8.00%
-3.00%
2.00%
7.00%
12.00%
17.00%
140
23.00%
120
13.00%
100
3.00%
80
60
-7.00%
40
-17.00%
-27.00%
20
Dah Sing Financial
0
(%)
Dah Sing Financial - 3M Realised - Vol
Dah Sing Financial - 6M Realised - Vol
Hang Seng Index - 3M Realised - Vol
Hang Seng Index - 6M Realised - Vol
Dah Sing Financial = -38
38 + 0.0037 * HSI Index
R Square = 0.445
Regression based on 261 observations of 5 years weekly data. Please refer to Appendix 1 for
the explanation of R-square
Sources: Bloomberg; BNP Paribas
Sources: Bloomberg; BNP Paribas
Hong Kong Sector Correlation Matrix at 13 July 2012
HK
Banks
Banks
Property
Utilities
1.00
0.78
0.40
1.00
0.37
Property
Utilities
1.00
Source: BNP Paribas Sector Strategy
Long/Short Chart
The Risk Experts
Our starting point for this page is a recognition of the macro
factors that can have a significant impact on stock-price
stock
performance, sometimes independently of bottom-up
bottom
factors.
Sep-09
0.61
Mar-10
Sep-10
Mar
Mar-11
Sep-11
Mar-12
Sep-12
0.56
0.51
+2s
0.46
With our Risk Expert page, we identify the key macro risks
that can impact stock performance.
+1s
0.41
0.36
Mean
0.31
This analysis enhances the fundamental work laid out in the
rest of this report, giving investors yet another resource to
use in their decision-making process.
-1s
0.26
0.21
-2s
0.16
(x)
Dah Sing Financial - Hang Seng Bank
Sources: Bloomberg; BNP Paribas
Sources: Bloomberg; BNP Paribas
26
BNP PARIBAS
20 SEPTEMBER 2012
Dah Sing Financial
Frank Yuen, CFA
Financial statements
Dah Sing Financial
Profit and Loss (HKD m) Year Ending Dec
2010A
2011A
2012E
2013E
2014E
Interest income
2,973
3,569
4,093
4,540
5,175
Interest expense
(794)
(1,383)
(1,571)
(1,677)
(1,889)
Net interest income
2,179
2,186
2,522
2,862
3,286
Net fees & commission
362
383
465
502
543
Foreign exchange trading income
278
242
258
271
284
Securities trading income
183
46
147
71
99
13
42
7
8
8
(223)
(8)
(56)
72
96
1,029
Dividend income
Other income
Non interest income
613
705
821
923
Total income
2,793
2,890
3,343
3,786
4,315
Staff costs
(905)
(1,035)
(1,048)
(1,153)
(1,268)
Other operating costs
(549)
(661)
(861)
(922)
(1,012)
(1,454)
(1,696)
(1,909)
(2,074)
(2,279)
1,339
1,194
1,435
1,711
2,035
(21)
(81)
(124)
(265)
(383)
Other provisions
0
0
0
0
0
Operating profit
Operating costs
Pre provision operating profit
Provisions for bad and doubtful debts
1,317
1,113
1,310
1,446
1,653
Recurring non operating income
257
366
373
414
460
Associates
257
366
373
414
460
Goodwill amortization
0
0
0
0
0
Non recurring items
1
(27)
(3)
40
40
Profit before tax
1,576
1,452
1,680
1,901
2,153
Tax
(214)
(164)
(220)
(247)
(278)
Profit after tax
1,361
1,288
1,460
1,653
1,875
Minority interests
(279)
(279)
(312)
(349)
(391)
Preferred dividends
0
0
0
0
0
Other items
0
0
0
0
0
1,083
1,009
1,148
1,304
1,484
Reported net profit
Non recurring items & goodwill (net)
(1)
27
3
(40)
(40)
1,082
1,036
1,151
1,264
1,444
Recurring EPS *
3.94
3.54
3.93
4.32
4.93
Reported EPS
3.95
3.45
3.92
4.45
5.07
DPS
1.04
1.04
1.18
1.34
1.52
Recurring net profit
We factor in a credit cost
rise to 27-36bp of loans in
2013/14E from a low base
of 15bp in 2012E.
Per share (HKD)
Growth
Net interest income (%)
(7.0)
0.3
15.4
13.5
14.8
Non interest income (%)
61.4
15.0
16.5
12.4
11.5
Pre provision operating profit (%)
15.9
(10.8)
20.1
19.3
18.9
Operating profit (%)
76.7
(15.5)
17.7
10.4
14.3
Reported net profit (%)
73.0
(6.8)
13.8
13.6
13.8
Recurring EPS (%)
46.9
(10.2)
11.1
9.8
14.2
Reported EPS (%)
61.3
(12.7)
13.8
13.6
13.8
Net interest income (%)
78.0
75.6
75.4
75.6
76.1
Net fees &commission (%)
13.0
13.2
13.9
13.3
12.6
Foreign exchange trading income (%)
10.0
8.4
7.7
7.1
6.6
Securities trading income (%)
6.6
1.6
4.4
1.9
2.3
Dividend income (%)
0.5
1.5
0.2
0.2
0.2
(8.0)
(0.3)
(1.7)
1.9
2.2
Gross interest yield (%)
2.45
2.94
2.70
2.81
2.97
Cost of funds (%)
0.74
1.14
1.20
1.21
1.26
Net interest spread (%)
1.71
1.81
1.50
1.60
1.70
Net interest margin (%)
1.80
1.80
1.66
1.77
1.88
Cost/income (%)
52.1
58.7
57.1
54.8
52.8
Cost/assets (%)
1.10
1.12
1.17
1.19
1.21
Effective tax rate (%)
13.6
11.3
13.1
13.0
12.9
Dividend payout on recurring profit (%)
26.3
29.3
29.9
31.0
30.8
8.5
7.0
7.4
7.8
8.4
ROE - COE (%)
(1.7)
(3.1)
(2.7)
(2.3)
(1.7)
ROA (%)
1.03
0.87
0.90
0.93
0.98
RORWA (%)
1.69
1.46
1.51
1.57
1.65
Income breakdown
Other income (%)
Operating performance
ROE (%)
We expect an ongoing NIM
expansion of 11bp in
2012E-14E, riding on
accretion of asset yield and
ease of funding cost
*Pre exceptional, pre-goodwill and fully diluted
Sources: Dah Sing Financial; BNP Paribas estimates
27
BNP PARIBAS
20 SEPTEMBER 2012
Dah Sing Financial
Frank Yuen, CFA
Dah Sing Financial
Balance Sheet (HKD m) Year Ending Dec
2010A
2011A
2012E
2013E
2014E
Gross customer loans
83,705
93,129
96,854
104,602
112,970
(396)
(385)
(459)
(452)
(589)
0
83,309
0
92,744
0
96,395
0
104,150
0
112,382
Bank loans
Government securities
3,249
0
5,184
0
5,599
0
6,047
0
6,531
0
Trading securities
Investment securities
12,006
26,973
13,569
26,063
14,655
28,148
15,827
30,400
17,093
32,832
Cash & equivalents
Other interest earning assets
9,581
0
12,218
0
12,100
0
13,068
0
14,114
0
Tangible fixed assets
Associates
3,613
1,619
4,491
2,030
4,625
2,443
4,764
2,666
4,907
2,912
Goodwill
Other intangible assets
1,066
0
1,050
0
1,000
0
950
0
900
0
1,327
142,742
1,805
159,153
2,162
167,128
2,591
180,464
3,106
194,776
Customer deposits
Bank deposits
96,127
1,524
111,629
2,385
116,094
1,834
125,382
2,081
135,412
2,014
Other interest bearing liabilities
Non interest bearing liabilities
17,331
10,107
14,162
11,846
16,080
13,466
16,783
15,387
17,518
17,671
0
125,088
0
140,022
0
147,473
0
159,633
0
172,616
Share capital
Reserves
586
13,571
586
14,685
586
15,068
586
15,981
586
17,020
Total equity
Minority interests
14,156
3,497
15,270
3,861
15,654
4,000
16,567
4,264
17,605
4,555
142,742
159,153
167,128
180,464
194,776
Total provisions
Interest in suspense
Net customer loans
Other assets
Total assets
Hybrid Capital
Total liabilities
Total liabilities & equity
Supplementary items
Risk weighted assets (RWA)
85,658
94,281
99,005
106,905
115,384
121,209
107,368
121,209
121,578
151,805
131,092
161,563
139,127
174,460
149,596
8,941
14,533
9,822
14,532
10,878
15,588
11,838
16,548
12,912
17,622
182
386
468
512
559
Book value per share
48.35
52.15
53.46
56.58
60.13
Tangible book value per share
44.71
48.57
50.05
53.34
57.05
Gross customer loans (%)
Average interest earning assets (%)
22.1
5.6
11.3
0.0
4.0
25.2
8.0
6.4
8.0
8.0
Total assets (%)
Risk weighted assets (%)
16.5
13.6
11.5
10.1
5.0
5.0
8.0
8.0
7.9
7.9
8.8
16.1
4.0
8.0
8.0
Average interest earning assets
Average interest bearing liabilities
Tier 1 capital
Total capital
Gross non performing loans (NPL)
Per share (HKD)
Growth
Customer deposits (%)
Leverage & capital measures
Customer loans/deposits (%)
86.7
83.1
83.0
83.1
83.0
Equity/assets (%)
9.9
9.6
9.4
9.2
9.0
Tangible equity/assets (%)
9.2
8.9
8.8
8.7
8.6
RWA/assets (%)
Tier 1 CAR (%)
60.0
10.4
59.2
10.4
59.2
11.0
59.2
11.1
59.2
11.2
Total CAR (%)
17.0
15.4
15.7
15.5
15.3
(66.7)
111.4
21.4
9.3
9.2
0.2
0.5
0.4
0.4
0.5
0.5
0.5
0.4
0.5
0.5
Asset quality
Change in NPL (%)
NPL/gross loans (%)
Total provisions/gross loans (%)
Total provisions/NPL (%)
216.9
99.8
98.0
88.3
105.3
2010A
2011A
2012E
2013E
2014E
Recurring P/E (x) *
6.8
7.5
6.8
6.2
5.4
Recurring P/E @ target price (x) *
Reported P/E (x)
8.6
6.8
9.6
7.7
8.6
6.8
7.9
6.0
6.9
5.3
Dividend yield (%)
Price/book (x)
3.9
0.6
3.9
0.5
4.4
0.5
5.0
0.5
5.7
0.4
Valuation
Price/tangible book (x)
0.6
0.5
0.5
0.5
0.5
Price/tangible book @ target price (x)
0.8
0.7
0.7
0.6
0.6
* Pre exceptional, pre-goodwill and fully diluted
Sources: Dah Sing Financial; BNP Paribas estimates
28
BNP PARIBAS
20 SEPTEMBER 2012
Dah Sing Financial
Frank Yuen, CFA
History of change in investment rating and/or target price
Dah Sing Financial (440 HK)
Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12
81.19
Date
Reco
TP
5-Dec-10
BUY
76.20
71.19
61.19
51.19
41.19
31.19
21.19
11.19
(HKD)
Dah Sing Financial
Target Price
Frank Yuen started covering this stock from 20-Sep-2012
Price and TP are in local currency
Valuation and risks: We value DSFH at HKD33.90 based on a sum-of-the-parts (SoTP) valuation of: 1) its banking arm DSB, at 0.76x FY13E P/BV, 2) its insurance business DSL, at
0.5x FY13E P/EV. In addition, we apply a 15% holding company discount in our valuation. The key risk would be a sharp asset-quality deterioration, driven by a massive economic
slowdown in both Hong Kong and Mainland loan portfolios
Sources: Bloomberg; BNP Paribas
29
BNP PARIBAS
20 SEPTEMBER 2012
Dah Sing Financial
Frank Yuen, CFA
NOTES
NOTES
NOTES
\
\
\
\
\
\
\
\
\
\
30
BNP PARIBAS
20 SEPTEMBER 2012
Dah Sing Financial
Frank Yuen, CFA
NOTES
NOTES
NOTES
\
\
\
\
\
\
\
\
\
\
31
BNP PARIBAS
20 SEPTEMBER 2012
Dah Sing Financial
Frank Yuen, CFA
NOTES
NOTES
NOTES
NOTES
\
\
\
\
\
\
\
\
\
\
32
BNP PARIBAS
20 SEPTEMBER 2012
Dah Sing Financial
Frank Yuen, CFA
Disclaimers and Disclosures
ANALYST(S) CERTIFICATION
Frank Yuen, CFA, BNP Paribas Securities (Asia) Ltd, +852 2825 1863, frank.yuen@asia.bnpparibas.com.
Dominic Chan, CFA, BNP Paribas Securities (Asia) Ltd, +852 2825 1175, dominic.chan@asia.bnpparibas.com.
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compensation of the analyst(s) was, is, or will be, directly or indirectly, relate to the specific recommendation or views expressed herein; and (iii) is not
aware of any other actual or material conflicts of interest concerning any of the subject securities, companies or issuers referenced herein as of the time of
this certification.
Analysts mentioned in this disclaimer are employed by a non-US affiliate of BNP Paribas Securities Corp., and are not registered/ qualified pursuant to
NYSE and/ or FINRA regulations.
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33
BNP PARIBAS
20 SEPTEMBER 2012
Dah Sing Financial
Frank Yuen, CFA
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All research reports are disseminated and available to all clients simultaneously through our internal client websites. For all research available on a
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1
No portion of this report was prepared by BNP Paribas Securities Corp (US) personnel and it is considered Third-Party Affiliate research under NASD Rule 2711.
IMPORTANT DISCLOSURES
The disclosure column in the following table lists the important disclosures applicable to each company that has been rated and/or recommended in this
report:
Company
-
Disclosure (as applicable)
-
BNP Paribas represents that:
1. Within the past year, it has managed or co-managed a public offering for this company, for which it received fees.
2. It had an investment banking relationship with this company in the last 12 months.
3. It received compensation for investment banking services from this company in the last 12 months.
4. It beneficially owns 1% or more or the market capitalization of this company.
5. It makes a market in securities in respect of this company.
6. The analyst(s) or an individual who assisted in the preparation of this report (or a member of his/her household) has a financial interest position in
securities issued by this company or derivatives thereof.
7. The analyst (or a member of his/her household) is an officer, director, or advisory board member of this company.
Additional Disclosures
Within the next three months, BNP Paribas may receive or seek compensation in connection with an investment banking relationship with one or more of
the companies referenced herein.
Target price history, stock price charts, valuation and risk details, and equity rating histories applicable to each company rated in this report is available in
our most recently published reports available on our website: http://eqresearch.bnpparibas.com, or you can contact the analyst named on the front of this
note or your BNP Paribas representative.
All share prices are as at market close on 18 September 2012 unless otherwise stated.
34
BNP PARIBAS
20 SEPTEMBER 2012
Dah Sing Financial
Frank Yuen, CFA
RECOMMENDATION STRUCTURE
Stock Ratings
Stock ratings are based on absolute upside or downside, which we define as (target price* - current price) / current price.
BUY (B). The upside is 10% or more.
HOLD (H). The upside or downside is less than 10%.
REDUCE (R). The downside is 10% or more.
Unless otherwise specified, these recommendations are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a
temporary mismatch between upside/downside for a stock based on market price and the formal recommendation.
* In most cases, the target price will equal the analyst's assessment of the current fair value of the stock. However, if the analyst doesn't think the market will
reassess the stock over the specified time horizon due to a lack of events or catalysts, then the target price may differ from fair value. In most cases, therefore, our
recommendation is an assessment of the mismatch between current market price and our assessment of current fair value.
Industry Recommendations
Improving (é): The analyst expects the fundamental conditions of the sector to be positive over the next 12 months.
Neutral (çè): The analyst expects the fundamental conditions of the sector to be maintained over the next 12 months.
Deteriorating (ê): The analyst expects the fundamental conditions of the sector to be negative over the next 12 months.
Country (Strategy) Recommendations
Overweight (O). Over the next 12 months, the analyst expects the market to score positively on two or more of the criteria used to determine
market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index
returns relative to the market cost of equity.
Neutral (N). Over the next 12 months, the analyst expects the market to score positively on one of the criteria used to determine market
recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns
relative to the market cost of equity.
Underweight (U). Over the next 12 months, the analyst does not expect the market to score positively on any of the criteria used to determine
market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index
returns relative to the market cost of equity.
RATING DISTRIBUTION (as at 19 September 2012)
Total BNP Paribas coverage universe
586
Buy
Hold
Reduce
Investment Banking Relationship
(%)
322
Buy
5.6
192
Hold
1.6
72
Reduce
4.2
Should you require additional information concerning this report please contact the relevant BNP Paribas research team or the author(s) of this report.
© 2012 BNP Paribas Group
35
BNP PARIBAS
20 SEPTEMBER 2012
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FRANKFURT
GENEVA
LONDON
MADRID
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60325 Frankfurt
Germany
Tel (49 69) 7193 6637
Fax (49 69) 7193 2520
BNP Paribas
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Switzerland
Tel (41 22) 787 7377
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BNP Paribas
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UK
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Fax (44 20) 7595 2555
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28006 Madrid
Spain
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20121 Milan
Italy
Tel (39 02) 72 47 1
Fax (39 02) 72 47 6562
PARIS
ZURICH
MANAMA
BNP Paribas Equities France
Société de Bourse
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75009 Paris
France
Tel (33 1) 4014 9673
Fax (33 1) 4014 0066
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8022 Zurich
Switzerland
Tel (41 1) 229 6891
Fax (41 1) 267 6813
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Manama
Bahrain
Tel (973) 53 3978
Fax (973) 53 1237
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