Defensive, but not much more
Earnings for Hong Kong banks are holding up better than our
original bearish expectations, but they remain far from exciting. We
forecast core PPOP growth of just 4% in 2008 and 9% in 2009. The
sector is defensive, but absolute upside is limited in our view.
Recommendation and valuation summary
FY09F
Rec. Price Target +/- PBV PER P/PPOP Yield ROE
(HK$) (HK$) (%) (X) (X) (X) (%) (%)
BEA Sell 46.8 42.0 (10.2) 2.0 15.5 11.7 3.9 13.5
BOCHK Hold 19.5 20.0 2.8 2.0 12.7 9.6 4.7 15.9
CIFH Hold 5.32 4.10 (22.9) 1.0 8.2 21.5 1.8 12.3
DSBG Hold 15.0 18.7 25.0 1.3 9.3 7.0 5.4 14.7
DSF Hold 58.4 68.5 17.4 1.2 8.4 5.4 4.2 14.6
FBHK Hold 7.80 6.00 (23.1) 2.0 16.9 11.9 3.6 12.3
HSB Hold 154.2 145.0 (6.0) 4.4 16.1 14.8 4.5 28.5
HSBC Hold 131 128 (2.2) 1.4 9.8 4.5 6.2 14.7
ICBCA Buy 20.6 25.0 21.7 1.4 11.3 8.6 5.3 13.2
STAN Hold 272 259 (4.9) 2.0 12.6 6.9 2.7 16.7
WHB Hold 107 112 4.7 2.5 13.9 11.8 3.7 18.8
WLB Hold 149.5 84.5 (43.5) 2.5 21.4 17.8 2.8 12.1
Priced at close of business 26 May 2008
Source: ABN AMRO forecasts
Earnings are holding up better than expected
Earnings this year seem to be holding up better than our bearish expectations
established in January this year: NIM pressure seems less severe than expected
(widening loan spreads, rising loan/deposit ratios partially offsetting free funds
pressure and lower deposit spreads), SME credit quality looks resilient so far, and
loan growth has remained strong (+6% ytd) thanks to negative real interest rates.
But growth remains far from exciting
After factoring in a more resilient outlook, earnings growth remains unexciting. We
estimate that average core PPOP growth (ex CDO/SIV charges) will fall from 34% in
2007 to 4% for 2008 and 9% for 2009. Fee income continues to be weighed down by
the weak equity market. Deposit growth has been sluggish this year (down 1% ytd),
and will likely be a significant drag on growth in total assets and net interest income,
especially for a banking system that has a loan/deposit ratio of just 54%.
Raising earnings forecasts for HSB and BOCHK
We have raised our FY08-09 EPS forecasts for HSB and BOCHK by 7-10% to reflect a
more resilient NIM (20bp upgrade; we now expect a stable FY08 NIM for HSB and a
5-10bp decline for BOCHK, and a 5-10bp for both in FY09) and also better insurance
revenues on the back of likely strong growth of single-premium term deposit
substitute products given the low interest rate environment.
Defensive, but absolute upside looks limited
We see limited absolute upside for HK banks, given unexciting dynamics and lack of
positive earnings momentum (we are mostly in line to a little below consensus).
However, the sector would be defensive given its low beta and in some cases high
yields. Reflecting our earnings revisions, we increase our target price for HSB to
HK$145 and for BOCHK to HK$20, and upgrade our ratings to Hold (from Sell). We
maintain our Sell rating on BEA given our view of expensive valuations, lack of
positive earnings surprise and thin capital. We raise our sector weighting within Asian
banks to Neutral (from Underweight).
Produced by: ABN AMRO
Bank NV Hong Kong
Branch
HSI: 24127.31
BBG AP Banks: 174.46
Neutral
Sector relative to market
Sector performance
(1M) (3M) (12M)
Absolute -8.8 -2.3 -1.8
Absolute % -4.8 -1.3 -1.0
Rel market % 0.7 -3.0 -15.8
Source: Bloomberg
www.abnamroresearch.com
Analysts
Simon Ho, CFA
Hong Kong
+852 2700 5160
simon.ho@hk.abnamro.com
Sharnie Wong
+852 2700 5596
sharnie.wong@hk.abnamro.com
38/F Cheung Kong Center, 2 Queen's Road Central, Hong Kong

Contents
B A N K S 2 7 M A Y 2 0 0 8 2
I N D U S T R Y D Y N A M I C S
Unexciting earnings dynamics 3
Earnings seem to be holding up better than our bearish expectations established
in January this year. But even after factoring in a more resilient outlook, we
believe growth prospects remain unexciting.
Earnings are holding up better than expected 3
But growth is still far from exciting 5
V A L U A T I O N C O M M E N T
Lack of positive earnings surprise 8
Absolute upside looks limited for HK banks, given unexciting dynamics and lack of
positive earnings momentum. But the sector will be defensive, in our view, given
its low beta and in some cases high yields.
Raising earnings forecasts for the big banks 8
C O M P A N Y P R O F I L E S
Company profiles 13
Bank of East Asia 13
BOC Hong Kong (Holdings) 20
Hang Seng Bank 27
ICBC Asia 34