Hang Seng Bank's FY14 net profit crashes 43% to HK$15.1bn

Higher credit costs were cited.

Hang Seng Bank reported FY14 net profit of HK$15.1bn, down 43 percent y/y, core earnings being three percent below expectations on higher credit costs.

According to a research note from Barclays, excluding an impairment loss on Industrial Bank of HK$2.1bn, property revaluation gain of HK$521m, and net insurance loss of HK$820m in 2H (reflecting an assumption change), underlying profit was HK$16.5bn.

The report said this was three percent below Barclays' expectations due to higher-than-expected credit cost in China in 2H.

It also said the bank's management guides for margin pressure and slower loan growth in 2015.

Here's more from Barclays:

We lower our PT to HK$155 (from HK$160) based on our unchanged SOTP methodology, reflecting a 6-7% reduction in FY15-16E profit estimates from higher credit costs and margin pressure.

Asset quality deterioration in China: Credit costs for the group rose to 25bp in 2H (from 11bp in 1H) as specific impairments rose due to a few isolated cases in China. The Asia-Pacific individually impaired loans ratio (predominantly China-related) rose to 0.76% in 2H (1H: 0.25%).

Management said they did not see any systemic deterioration concentrated in any particular industry or location in China, but are focusing on good quality corporate customers in the slowing economy.

Strong capital position supportive of higher dividends: HSB is well placed to meet future regulatory requirements, in our view, with a fully-loaded 14.3% CET1 post the sale of a 5% stake in IB in February 2015 per management (vs reported CET1 of 10.5% in FY14), taking into account a 4.5% minimum CET1, 2.5% counter cyclical buffer, 2.5% capital conservation buffer, potential DSIB buffer of 1.0-3.5% and a management buffer of 1-2%.

We believe this paves the way for a higher dividend payout going forward (FY14 payout: 65%), and the sale of the remaining 5.9% stake in Industrial Bank remains a key positive catalyst.