Hang Seng Bank Net Doubles to Record on Accounting Gain

Hang Seng Bank Ltd. (11), the Hong Kong lender controlled by HSBC Holdings Plc (HSBA), said first-half profit doubled to a record, beating the highest estimate in a survey on a one-time accounting gain and higher loan and fee income.

Net income climbed to HK$18.5 billion ($2.4 billion), or HK$9.66 a share, from a restated HK$9.25 billion, or HK$4.84, a year earlier, as the bank changed its treatment of a 10.9% stake in Industrial Bank Co. (601166), Hang Seng said in a filing to the Hong Kong stock exchange yesterday. That exceeded the HK$16.1 billion median of six analyst estimates surveyed by Bloomberg News. The figures ranged from HK$12.8 billion to HK$17.4 billion as predictions for the accounting gain varied.

Hong Kong’s second-largest local lender by assets booked a one-time gain of HK$9.52 billion as it reclassified the stake as a financial investment instead of an associate. China’s slowing economy, funding costs in Hong Kong and on the mainland and greater competition will contribute to a challenging operating environment in the second half, Chief Executive Officer Rose Lee said at a news conference yesterday.

“With a more challenging outlook in the second half and the unlikely sale of Industrial Bank in the near term, we see a lack of near-term positive catalysts on Hang Seng Bank,” Sharnie Wong, a Hong Kong-based analyst of Barclays Plc, wrote in a research report yesterday.

Shares in the bank lost 0.3 percent to HK$121.20 in Hong Kong trading at the mid-day break, poised for the first decline in five days. The stock has risen 2.1 percent this year, compared with the benchmark Hang Seng Index’s 3.4 percent drop.

Bank Lending

Hang Seng joins Bank of East Asia Ltd. (23), the third-largest local lender, in beating analyst estimates as Hong Kong lending surged in June. Excluding the one-time gain on the Industrial Bank stake, Hang Seng’s first-half net income’s increased 27 percent from a year earlier, according to yesterday’s statement.

The bank’s lending climbed 8.1 percent from the end of last year to HK$581.1 billion as of June 30, compared with the industry’s 9.5 percent rate and 9.3 percent at Bank of East Asia.

“Intensifying competition for deposits will drive up the cost of funds,” Ismael Pili, head of Asia bank research at Macquarie Capital Securities Ltd., said in an e-mail. “Funding cost holds the key” to Hang Seng’s lending margin.

China Earnings

Net interest income, the difference between what the bank makes from lending and what it pays on deposits, rose 8.2 percent to HK$8.97 billion. Hang Seng’s net interest margin, a measure of lending profitability, was unchanged at 1.84 percent compared with the second half of last year, according to the statement.

Net fee and commission income, from services such as credit cards and selling mutual funds, increased 22 percent to HK$2.94 billion.

In mainland China, Hang Seng’s operating profit declined 35 percent to HK$129 million from a year earlier as net interest income fell. Pretax profit in China, including an accounting gain of HK$8.45 billion from the Industrial Bank stake, jumped 250 percent to HK$8.6 billion.

The bank plans to add branches and expand existing ones in select areas of China, without “massively” booting its presence in the country, Lee told reporters in Hong Kong today.

The bank’s total capital adequacy ratio under the latest Basel III rules was 15.8 percent, while core equity Tier 1 capital ratio was 13.6 percent, Hang Seng said in the statement. It didn’t give comparative figures as this is the first year for such disclosure.

Mortgage Lending

Hang Seng’s net interest margin on mortgages widened slightly in the first half, Lee said, adding that she doesn’t see much room for higher mortgage pricing as the city’s property transactions remain low.

The bank ranked second in the city’s home loan market last month with a 15.2 percent market share, according to Hong Kong-based mReferral Mortgage Brokerage Services. That compared with a 15.7 percent share at Bank of China (Hong Kong) Ltd.

While home lending will slow in the second half of the year, mortgage pricing will remain stable, Lee said. The bank plans to focus on middle-class home buyers and buyers who plan to live in purchased properties.

Home transactions fell to the lowest since 1996 in the first half after the government in February doubled stamp duty taxes on property sales to quell concerns that an asset bubble is forming. Homebuyers’ sentiment was further damped by signals that interest rates will soon begin to increase as the U.S. economic recovery strengthens.

Since taking office in July 2012, Hong Kong Chief Executive Leung Chun-ying has also favored local permanent residents over foreigners, tightened mortgages and increased land supply after home prices doubled since 2009. The value of new mortgages approved in June declined 26 percent to HK$15.7 billion from HK$21.3 billion a year earlier, right before Leung’s tenure began.

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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