Guosen (Hong Kong): First to give BOC HONG KONG (02388) a "outperform" rating with a target price of 43.6-48.4 Hong Kong dollars.

Guosen (Hong Kong) released a research report stating that it is giving a "outperform" rating for the first time on BOC HONG KONG (02388), and is forecasting the company's net profit attributable to shareholders for 2025-2027 to be 38.9/40.2/42.7 billion Hong Kong dollars, with year-on-year growth of 1.8%/3.4%/6.2%. The EPS is expected to be 3.68/3.81/4.04 Hong Kong dollars, corresponding to PEs of 10.0/9.7/9.1 times, and PBs of 1.09/1.04/0.98 times. Based on both absolute and relative valuation, the bank believes that the company's fair share price is in the range of 43.6-48.4 Hong Kong dollars, representing around 18%-31% premium space compared to the closing price on October 10th. Guosen (Hong Kong) main points of view are as follows: Rapid revenue and profit growth, improved profitability In the first half of 2025, the company achieved operating income of 40 billion Hong Kong dollars, a year-on-year increase of 13.3%; and a net profit attributable to shareholders of 22.2 billion Hong Kong dollars, a year-on-year increase of 10.5%. The annualized weighted average ROE for the first half of the year was 12.9%, an increase of 0.5 percentage points year-on-year. Steady growth in asset size As of the end of June, the company's total assets increased by 10.0% year-on-year to 4.4 trillion Hong Kong dollars, a 4.9% increase from the beginning of the year, with market share remaining stable compared to the beginning of the year. Deposits at the end of June increased by 5.8% from the beginning of the year to 2.87 trillion Hong Kong dollars, and total loans increased by 2.0% from the beginning of the year to 1.71 trillion Hong Kong dollars. The Tier 1 capital ratio at the end of June was 20.05%, an increase of 0.03 percentage points from the beginning of the year. Net interest margin declined, monitoring the subsequent rate cuts by the Federal Reserve The average net interest margin for the first half of the year was 1.34%, a decrease of 12 basis points year-on-year, with a larger decrease than the previous year's annual report, leading to a 3.5% year-on-year decrease in net interest income to 25.1 billion Hong Kong dollars in the first half of the year. The decline in net interest margin is mainly due to the Federal Reserve entering a rate cut cycle, with market rates lower than the same period last year, leading to a decrease in asset yields. CME Fed observation tools show that there is a high probability of rate cuts by the Fed this year and next year, which is expected to bring certain pressure on the company's net interest margin and overall performance. Significant growth in non-interest income In the first half of the year, fee-based net income increased by 25.8% year-on-year, mainly due to the warming of the investment market atmosphere, with the company seizing the opportunity of customer wealth management needs, leading to significant growth in insurance, securities brokerage, fund distribution, and management commission income. Other non-interest income increased by 99.1% year-on-year, mainly due to the rise in global market trading business income and market volatility driving up prices of foreign exchange-related products, leading to a significant increase in net trading income. Non-performing loan ratio increased but asset quality still relatively strong The calculated non-performing loan ratio in the first half of the year was 0.40%, an increase of 0.32 percentage points year-on-year, with a credit cost ratio of 0.40%, an increase of 0.16 percentage points year-on-year. The impairment loan ratio was 1.02% as of the end of June, a decrease of 0.03 percentage points from the beginning of the year, mainly attributed to the restructuring and write-off of individual outstanding non-performing accounts and repayment of individual non-performing accounts. The provision coverage ratio was 86% as of the end of June, an increase of 1 percentage point from the beginning of the year. The impairment loan ratio has been on the rise since 2022, but still remains below the industry average level. Overall, the company's asset quality pressure has increased slightly, but still remains relatively strong compared to the industry as a whole.