Hang Seng Bank, Rated World’s Strongest, Sees Profit Decline

Hang Seng Bank Ltd. (11), the Hong Kong lender controlled by HSBC Holdings Plc, reported lower first-half profit because of an accounting change and reduced gains from property valuations.

Net income for the January-June period dropped 54 percent to HK$8.47 billion ($1.1 billion), or HK$4.43 a share, from HK$18.47 billion, or HK$9.66 a year earlier, Hang Seng said in an exchange filing today. Excluding a previous one-time gain connected with Hang Seng’s stake in Industrial Bank Co., profit fell 5.4 percent.

Hang Seng, the world’s strongest bank in a Bloomberg Markets magazine ranking of 97 lenders in June, was Barclay Plc’s “top pick” among Hong Kong banks in a report last month for reasons including its success in attracting deposits. Risks ahead include any property-market slowdown in the city, according to Ronald Wan, chief China adviser at Asian Capital Holdings Ltd.

“If the property market devalued or was seriously affected, the bank will be operating in a very difficult environment,” Wan said by phone in Hong Kong. “It is much more focused on Hong Kong businesses and it doesn’t have too much overseas business.”

Operating profit rose 6 percent to HK$9.5 billion, the bank, Hong Kong’s second-largest lender by assets, said. Net interest margin, a measure of lending profitability, rose to 1.92 percent in the first half from 1.84 percent a year earlier. Net interest income climbed 7.8 percent to HK$9.7 billion.

Margin Pressure

Chief executive Rose Lee said the bank’s net interest margin may come under pressure in the second half of this year amid competition for deposits in Hong Kong and limited increases in interest rates for mortgages. In China, Hang Seng’s bad loans may worsen because of the nation’s economic slowdown and property-market decline, Lee said at a briefing in Hong Kong.

The company is taking a “cautious” approach to lending on the mainland “in light of the more difficult operating conditions for mainland businesses,” it said in today’s statement.

Hang Seng is set to benefit from rising interest rates and has a lower exposure than competitors to lending in mainland China, where bad loans are rising, Barclays analyst Sharnie Wong wrote in a report last month. Key risks could include any economic slowdown in Hong Kong, Wong said.

Housing Risks

The city’s housing sales plunged last year and the Hong Kong Monetary Authority said in June that the property market remained a concern for “macro-financial stability.”

Hang Seng was the third-ranked home lender in the city, with a 16 percent share of new mortgage registrations, according to the company’s statement today. The bank’s residential mortgage lending grew 2.4 percent from the end of 2013, the statement showed.

Hang Seng was rated strongest in the Bloomberg Markets ranking of banks with at least $100 billion of assets on the basis of measures including ratio of Tier 1 capital to risk-weighted assets. Hang Seng operates separately from HSBC, which owns 62 percent of the Hong Kong lender.

Hang Seng Bank booked a one-time gain of HK$9.52 billion in the first half of 2013 as it reclassified its 10.9 percent stake in Industrial Bank (601166), a lender based in the southern Chinese city of Fuzhou, as a financial investment instead of an associate.

To contact Bloomberg News staff for this story: Aipeng Soo in Beijing at asoo4@bloomberg.net

To contact the editors responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net Paul Panckhurst, Robin Ganguly

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