Hang Seng Sees Tougher Market After Beating Estimates

Hang Seng Bank Ltd. (11) posted a 14 percent jump in first-half earnings, beating analysts’ estimates, while signaling that lending profitability may come under pressure as competition for deposits increases.

Net income at the HSBC Holdings Plc (HSBA) unit climbed to HK$9.3 billion ($1.2 billion) from HK$8.16 billion a year earlier, Hong Kong’s second-largest bank said in an exchange filing yesterday. The net interest margin, a measure of lending profitability, widened to 1.85 percent from 1.75 percent a year earlier.

Hang Seng Chief Executive Officer Rose Lee increased mortgages, credit card issuance and corporate lending in Hong Kong, while adding mainland clients with cross-border products and services as China encourages expansion of the offshore-yuan market. Competition for deposits will weigh on lending margins for the rest of the year, she said yesterday.

“Performance in the first half was better than expected but there are challenges in the second half,” said Ronald Wan, a Hong Kong-based managing director at China Merchants Securities Co., citing the fight for yuan deposits. “China’s economic slowdown will also affect Hang Seng (HSI)’s earnings as its operations in China are likely to report slower growth.”

The lender’s first-half profit beat the HK$8.26 billion average estimate of seven analysts surveyed by Bloomberg News. Its shares rose 0.7 percent at 1:40 p.m., bringing its gain this year to 18 percent.

HSBC Climbs

HSBC rose 1.3 percent in Hong Kong trading, while the benchmark Hang Seng stock index advanced 1.1 percent. Hang Seng’s London-based parent reported an 8.3 percent drop in profit and said it would set aside $2 billion more to cover fines and lawsuits.

“There will be pressures on net interest margin in the second half in terms of deposits,” Lee told reporters in Hong Kong. “Banks’ competition for yuan deposits is particularly intense because of the increase of cross-border lending demand, pushing up yuan deposit rates.”

Loan profitability of Hong Kong banks has fallen for five consecutive years, spurring lenders to seek revenue growth from China-related business by expanding their presence on the mainland and offering yuan services at home.

“Loan growth will remain slow due to slow economic activity,” Patrick Pong and Stanley Li of Mirae Asset Securities Securities (HK) Ltd. wrote in a note to clients. “We expect the bank’s net interest margin to stabilize as scope for further drops in funding costs looks limited.”

Margins Narrow

The average net interest margin of Hong Kong retail lenders narrowed to 1.25 percent last year from 1.87 percent in 2007, the Hong Kong Monetary Authority said in its annual reports. The margin of BOC Hong Kong (Holdings) Ltd. (2388), the largest Hong Kong- based lender, narrowed by 17 basis points last year to 1.32 percent. Bank of East Asia Ltd., the city’s largest family-run lender, also saw its margin squeezed by 3 basis points to 1.75 percent.

Bank of East Asia will publish its first-half earnings Aug. 2 while BOC Hong Kong, the local unit of Bank of China Ltd., will report in the week of Aug. 20.

The Hang Seng Finance Index, a subindex of the city’s benchmark, has gained 5.6 percent this year, compared with 7.4 percent for the main Hang Seng Index.

Hang Seng Bank generated HK$2.47 billion of pretax profit from its mainland China business in the first half of the year to account for 23.1 percent of the total, compared with 18.3 percent a year ago, the bank said in a statement yesterday. Hang Seng Bank started offering the world’s first yuan-denominated gold exchanged-traded fund in February, the month Lee was appointed.

Net interest income rose 8.5 percent to HK$8.29 billion while net fee income, derived largely from credit cards, stockbroking services and selling mutual funds, fell 5 percent to HK$2.41 billion.

To contact the reporter on this story: Stephanie Tong in Hong Kong at stong17@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net

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