Central Aug 3, 2020 (Thomson StreetEvents) — Edited Transcript of Dangle Seng Bank Ltd earnings convention name or presentation Monday, August 3, 2020 at 5:00:00am GMT
Morgan Stanley, Analysis Division – Head of ASEAN Banks Analysis and Government Director
* S. Huang
Good afternoon, girls and gents. As a result of COVID-19 scenario, we’re bringing you these outcomes by audio webcast solely. On the road are Dangle Seng Bank’s Vice Chairman and Chief Government, Ms. Louisa Cheang; and our Chief Monetary Officer, Mr. Andrew Leung. Different members of our senior administration staff, as proven on the webcast display screen, are additionally current. They may all be accessible to reply your questions later.
Now I hand over to our Chief Government to start out the presentation. Mr. Cheang, please.
Thanks, May. Good afternoon, girls and gents. Thanks for becoming a member of this audio webcast. For a extra detailed have a look at our 2020 half 12 months outcomes. The primary 6 months of 2020 had been extraordinarily difficult for all companies, regardless of what we would have hoped for earlier within the 12 months, the financial and complete affect of the COVID-19 pandemic stays a actuality in economies right here and all over the world.
As well as, Hong Kong is continuous to grapple with the opposed results of long-term points corresponding to worldwide commerce tensions and social scenario at dwelling. As can be anticipated, the tough surroundings has had an opposed affect on our first half outcomes, notably in comparison with a powerful first half in 2019 whereas our fundamentals stay strong, with robust capital base, wholesome liquidity place and secure market share, attributable revenue fell by 33% to $9,143 million.
The monetary efficiency was affected by Four important elements: first, contractions in web curiosity revenue and web curiosity margin within the low rate of interest surroundings; second, a drop in insurance coverage enterprise revenue, reflecting considerably decrease funding returns as a consequence of market volatility and a decline in new enterprise gross sales; third, enhance in anticipated credit score losses; and fourth, web deficit in property revaluation.
I’ll present extra particulars later within the monetary overview. Nevertheless, I want to level out that the monetary figures themselves don’t inform the entire story of Dangle Seng within the first half. Our key priorities within the first 6 months of the 12 months had been to guard the well being and security of our clients and staff, present uninterrupted banking and wealth administration companies and supply quick and hassle-free assist to client-facing hardships.
On the similar time, we proceed to spend money on expertise, construct new segments and drive enterprise enlargement to make sure we’re properly positioned to seize alternatives when markets rebound. Because of our continued funding in innovation and expertise, we had been in a position to reply swiftly and seamlessly to a pointy enhance in buyer demand for digital banking companies, amidst social distancing and COVID-related well being considerations. 12 months-on-year, the variety of new Private e-Banking registration and utilization of our Private Banking cell app in Hong Kong each elevated by 2/3.
Within the first half alone, we rolled out round 210 new digital improvements and enhancements, considerably equating the 150 we launched throughout the entire of 2019. A lot of the brand new digital companies and merchandise caters particularly for wants of the youthful clients, serving to them save and make investments whereas enhancing monetary inclusion. Digital improvements additionally lower transaction instances and streamline utility processes for our business clients. Our capability to proceed bettering service expertise and outcomes has resulted in demonstrable will increase in our aggressive and model energy. In a survey performed within the second quarter of this 12 months, Dangle Seng was 1 of the two main banks ranked the primary in customer support. We additionally ranked the primary for inclusion amongst key goal buyer segments, younger folks beneath 30 years of age rated us the highest bank for customer support. Mainland clients considered Dangle Seng because the #1 bank in Hong Kong for artistic monetary administration options.
As a bank with deep roots in Hong Kong, we’re delicate to the pressures that the pandemic has placed on completely different components of the neighborhood. We’re an lively participant in numerous authorities schemes to supply financial aid to clients in want. We additionally donated $10 million to supply tutorial assist to youngsters from underprivileged households impacted by the prolonged suspension of lessons.
Whereas expertise is a crucial a part of our customer-centric strategy, our workers stays our main aggressive benefit. Below tough circumstances, our staff have demonstrated flexibility and professionalism to reduce any disruption in service for purchasers.
Our initiatives to make it simpler for our folks to carry out at a excessive degree whereas sustaining a optimistic sense of well-being, are being properly obtained and appreciated. A latest survey indicated that the overwhelming majority of workers really feel optimistic about our efforts in supporting them throughout this era.
Now, let’s look deeper in our first-half monetary efficiency. As talked about earlier, risky market circumstances have had a big affect on our monetary efficiency. Internet working revenue fell by 20% to $17,427 million. Working revenue fell by 28% to $11,134. If we exclude change in ECL and different credit score impairment prices, working revenue declined by 20% to $12,894 million. Compared with the second half of 2019, working revenue dropped by 15% and working revenue, excluding change in ECLs, was down 10%.
Wanting on the key elements that almost all have an effect on our backside line. Internet curiosity revenue fell by 7% to $14,792 million, a drop of $1,061 million in contrast with $15,853 million in the identical interval final 12 months. Elevated volumes from steadiness sheet progress and a 5% progress in common interest-earnings property had been outweighed by the affect of declining rates of interest, which contributed to the general narrowing of web curiosity margin. NIM fell by 25 foundation factors to 1.96%, reflecting the flow-through of declining HIBOR and compression in loans and deposit spreads.
Noninterest revenue dropped by 33% to $4,395 million.
Internet charge revenue fell by 9%. The launch of our stand-alone securities buying and selling app facilitated a optimistic progress in charge revenue from stockbroking and associated companies. Nevertheless, this was greater than offset by the autumn in charge revenue from the extreme disruptions of commercial and business actions and a drop in card-based retail spending as folks stayed at dwelling because of the pandemic.
Internet buying and selling revenue and web revenue from monetary devices designated a good value by revenue or loss collectively grew by 27%, due primarily to elevated revenue from international exchange and spinoff buying and selling actions within the risky international exchange market.
Internet revenue from property and liabilities of the insurance coverage enterprise measured at honest value recorded a lack of $1,284 million, a discount of $2,348 million from a acquire of $1,064 million for a similar interval final 12 months, reflecting unfavorable actions in international equities market, with funding danger partly shared by the policyholders.
There was additionally a drop in web insurance coverage premium revenue with an offsetting motion in insurance policies liabilities and motion in current value of in-force long-term insurance coverage enterprise, due primarily to the decline in new enterprise gross sales that resulted from the challenges created by COVID-19 scenario.
Change in ECLs and different credit score impairment prices was $1,760 million, a rise of $1,250 million in contrast with $510 million in the identical interval final 12 months. I want to level out the numerous year-on-year enhance outcomes from the replace to the important thing variables in our credit score danger evaluation model to mirror anticipated future affect of constant uncertainties over COVID-19 and worldwide commerce insurance policies.
Total, credit score qualities stay strong. Gross impaired and advances as a proportion of gross loans and advances to clients stood at 0.32% on the finish of June 2020. That quantity was 0.22% at 2019 year-end and on the finish of June final 12 months.
Pragmatic value containment measures and enterprise efficiencies realized by improved operational processes and earlier investments in enterprise infrastructure lowered working bills by 1%. In contrast with the second half of 2019, working bills lowered by 6%. At 32.8%, our value effectivity ratio continues to match favorably with the native trade common. Following downturn of the property market, funding property revaluation additionally recorded a deficit of $428 million, a lower of $615 million from a acquire of $187 million for a similar interval final 12 months.
Attributable revenue fell by 33% to $9,143 million, with web curiosity revenue, noninterest revenue, ECLs and property revaluation being the Four important elements making a big affect on the revenue line.
Earnings per share had been down 34% at HKD 4.64 per share. And revenue earlier than tax fell by 33% to $10,619 million. In contrast with second half of final 12 months, attributable revenue and earnings per share fell by 18% and 20%, respectively, and revenue earlier than tax dropped by 18%.
Return on common odd shareholder fairness was 10.7% in contrast with 17% for the primary half of 2019. Return on common complete property was 1.1% in contrast with 1.7% for the primary half of final 12 months.
At 30th June 2020, our frequent fairness Tier 1 capital ratio was 16.3%, and our Tier 1 capital ratio was 18%, in contrast with 16.9% and 18.7%, respectively, at 31st December 2019. Our complete capital ratio was 19.7% in contrast with 20.8% at 2019 year-end.
Taking into consideration our regulator’s recommendation to preserve capital to fulfill future potential challenges brought on by the COVID-19 scenario, the administrators are persevering with to undertake a prudent strategy in managing the bank’s enterprise, together with willpower of dividend funds. As such, the administrators have declared a second interim dividend of $0.80 per share, bringing the entire distribution for the primary half of 2020 to $1.90 per share.
Gross advances to clients had been $958 billion, up by 1% in contrast with the top of 2019. Loans to be used in Hong Kong rose by 2%. Lending to firms and people grew by 3% and a pair of%, respectively. Loans to be used outdoors Hong Kong declined by 1%.
Buyer deposits, together with certificates of deposit and different debt securities in concern, had been up 4% at $1,302 billion.
Wealth and Private Banking recorded 26% year-on-year lower in working revenue, excluding change in ECLs and different credit score impairment prices to $6,297 million. Working revenue dropped by 33% to $5,557 million, and revenue earlier than tax decreased by 35% to 500 — for $5,468 million.
Regardless of profitable deepening buyer relationships to develop our steadiness sheet, with a 3% rise in common buyer deposits and seven% enhance in common buyer advances, declining rates of interest squeezed curiosity margins, leading to a 6% year-on-year drop in web curiosity revenue to $8,138 million.
Internet curiosity (sic) [noninterest] revenue fell by 46% to $2,078 million, reflecting the volatility in international funding markets, which had an opposed affect on funding returns from our life insurance coverage portfolio and our clients’ funding exercise.
Wealth administration revenue fell by 40%, due partially to many purchasers delaying the long-term funding choice within the unsure market circumstances.
Insurance coverage revenue fell by 60%, reflecting the numerous drop in funding returns from the life insurance coverage portfolio and the decline in new enterprise. We enriched and expanded our vary of merchandise, together with these leveraging the federal government’s tax concession measures. We additionally supported clients by offering extra protection for COVID-19 with no further premium required.
On a extra optimistic observe, the launch of Dangle Seng Make investments Categorical, our new stand-alone securities buying and selling app, helped drive progress in securities income and turnover of 40% and 58%, respectively.
Market challenges apart, our core efficiency remained strong. Our enhanced knowledge analytic capabilities and extra agile enterprise construction enabled us to anticipate altering buyer wants, and act swiftly to supply appropriate services and products. This introduced us new enterprise and a 13% year-on-year rise in Status and Most well-liked Banking buyer base.
Our complete digital companies channels enabled clients to proceed banking simply and safely, leading to substantial progress in numerous normal banking transactions and key product transactions performed by our Private Banking Cellular App.
In May, we obtained the distinguished “Finest Cellular Banking App” award within the Asian Banker’s Worldwide Excellence in Retail Monetary Providers Awards 2020. A benchmark report revealed by a worldwide consulting agency in June famous that our cell banking app is a prime performer in Hong Kong for options and person expertise.
We proceed so as to add service value with the launch of on-line in-app monetary instruments, corresponding to Financial savings Planner, SmartInvest and SimplyFund. They’re designed to fulfill budgeting and funding easy, notably for youthful clients. With among the many lowest minimal funding necessities available in the market, simply $1 for our new SimplyFund portfolio of funds, these new companies helped our digital funding buyer base grew by 23% year-on-year.
We remained a market chief for residential property loans, reaching a 2% rise in mortgage balances in Hong Kong in contrast with the top of 2019. Our new mortgage enterprise continued to rank amongst prime Three in Hong Kong. And we are going to keep management place for unsecured loans drawdowns.
Business Banking reported a 35% year-on-year drop in each working revenue and revenue earlier than tax to $3,227 million. We recorded a big enhance in ECLs and different credit score impairment prices, due partly to the updating of sure assumptions beneath our danger evaluation model. We contained impaired loans to gross advances at a low degree of 0.49%, in contrast with 0.34% on the finish of December and 0.35% in June final 12 months.
Working revenue, excluding change ECLs and different credit score impairment prices decreased by 21% to $4,048 million.
Internet curiosity revenue was down by 13% to $4,532 million, with a 5% progress in common loan balances, outweighed by the affect of low rates of interest on deposit curiosity revenue.
Noninterest revenue fell by 26% to $1,145 million. Funding companies revenue grew by 13%, reflecting profitable property to seize enterprise alternatives in securities-related companies amid risky markets. Nevertheless, this was greater than offset by a decline in fee-generating companies as a consequence of widespread disruption in business actions throughout all sectors.
Nevertheless, as with our retail operations, we maintained strong however prudent enterprise momentum and proceed to strengthen our market place to assist the enterprise neighborhood.
Our lively participation in syndicated lending noticed us attain the #1 rating within the Mandated Arranger Lead desk for Hong Kong and Macau Syndicated Loans for the primary half of 2020 when it comes to variety of offers.
Facilitated by extra agile operational infrastructure, our deep understanding of consumers’ companies enabled us to maneuver strictly to supply applicable assist and resolution in a extremely difficult surroundings. As of April this 12 months, our market share of deferred principal reimbursement loans approvals was 21%.
Designed to scale back time-to-cash for purchasers, our first-in-market on-line utility platform for the SME Financing Assure Scheme was well-received, accounting for 30% of the variety of purposes we’ve got obtained as of 30th June.
Digital service enhancement to assist clients save time, entry info extra simply and make sooner choices, together with increasing the capabilities of BERI, our business banking AI chatbot, to supply recommendation on trade-related issues. Prospects utilizing our cell app-based One-Click on Time Deposit can even place time deposits and preapproved preferential rates of interest with only one single click on.
International banking and markets collectively reported a year-on-year enhance of 15% in working revenue, excluding change in ECLs and different credit score impairment prices to $2,845 million, and a 9% progress in each working revenue and revenue earlier than tax to $2,646 million.
International Banking registered a 2% lower in working revenue excluding altering ECLs and different credit score impairment prices to $1,142 million. Working revenue and revenue earlier than tax each dropped by 11% to $994 million, due primarily to the upward revision of ECLs.
Internet curiosity revenue was broadly on par with a 12 months earlier at $1,224 million, due partly to our lending portfolio optimization technique. Our cash administration companies have develop into much more digital. Proactive initiative to supply clients tailor-made banking options helped drive a 2% enhance in deposit base in contrast with December final 12 months. We additionally help purchasers dealing with financial difficulties by participation in authorities monetary aid scheme.
A brand new Debt Capital Market Origination staff leverages our robust buyer relationship and efficient cross-business collaboration to quickly determine new wants in fast-moving markets, leading to a pickup in charge revenue.
International markets report a 30% enhance in working revenue, excluding change in ECL and different credit score impairment prices to $1,703 million. Working revenue and revenue earlier than tax each elevated by 27% to $1,652 million.
Internet curiosity revenue elevated by 15% to $1,196 million, reflecting profitable actions by the steadiness sheet administration staff to handle rate of interest danger successfully, defend the curiosity margin and obtain yield enhancement whereas upholding prudent danger administration requirements.
Noninterest revenue elevated by 39% to $784 million. The risky international exchange market, along with the altering rate of interest surroundings, drove a rise in nonfund revenue from gross sales and buying and selling actions. We continued with collaborative cross-bank initiatives to deepen penetration of International Market merchandise amongst business and capital banking clients.
Established within the second half of 2019, our Repo Buying and selling division contributed to the expansion and diversification of our income base within the first half of this 12 months.
Our robust core-border capabilities enabled us to keep up good momentum in our Mainland-related enterprise. Regardless of the tough financial surroundings, Dangle Seng China recorded a 12% year-on-year enhance in web working revenue earlier than loan impairment prices. Revenue earlier than tax grew by 11%.
To offer lively assist for the event of recent markets, our subsidiary, Dangle Seng Indexes Firm Restricted launch Dangle Seng TECH Index simply final week to risk the 30 largest progressive expertise firms listed in Hong Kong. We purpose for our Dangle Seng TECH index to develop into one other flagship index for Hong Kong market, alongside the Dangle Seng Index and the Dangle Seng China Enterprise Index.
Wanting forward, COVID-19, commerce rigidity, geopolitical rigidity and different uncertainties at dwelling and overseas are anticipated to convey continued disruption to industrial and business exercise, cut back shopper spending and suppress funding urge for food. The persistencies of low rate of interest will put additional strain on web curiosity margin and returns from interest-earning companies. These market-driven elements will proceed to problem top-line efficiency.
We might be vigilant in persevering with prices and proactively handle our credit score danger whereas remaining true to our central working precept of offering high-quality banking and wealth administration companies to clients.
Regardless of the continued challenges, we stay assured within the energy of our customer-centric progress technique for the long run. Our service improvements and proactive strategy are serving to us construct our portfolio and seize enterprise amongst new buyer segments. There’ll all the time be a necessity for banking and monetary companies. It can be crucial that we proceed to speculate properly for the longer term in expertise, in new markets, new segments and new merchandise to rebound from our strong fundamentals when the exterior surroundings improves.
Our aggressive edge can be sharpened by our highly-performing tradition and inspiring good collaboration and creativity among the many staff. Our staff are innovating and making vital contributions in including actual values and delivering optimistic outcomes for our clients. To assist the efficiency potential of our dynamic staff, we are going to proceed to spend money on expertise growth and in our folks’s total well-being.
Within the tough first half, each member of the Dangle Seng staff has stepped up, not solely to make sure our clients continued to take pleasure in excessive ranges of service, but in addition to assist one another. I want to specific heartfelt because of my colleagues for his or her exemplary efforts and invaluable contribution. Along with the administration staff, we are going to proceed to drive the bank in direction of long-term sustainable success. Thanks.
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Unidentified Firm Consultant, [3]
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Thanks, Louisa. We’ll now start our question-and-answer session. (Operator Directions). Ni Chen? Ni Chen, do we’ve got any questions?
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Questions and Solutions
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Operator [1]
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Sure. The primary query, we’ve got Yafei Tian from Citi.
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Yafei Tian, Citigroup Inc., Analysis Division – Assistant VP and Analyst [2]
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I’ve two questions, if I may. The primary one is round web curiosity margin. So trying on the decline in first half, is it potential to interrupt it all the way down to us from a Q-on-Q perspective? What’s the exit web curiosity margin for the quarter?
And alongside the identical line, on condition that HIBOR has continued to say no for the reason that second quarter degree, will there be any outlook when it comes to second half the place the online curiosity margin might be by finish of this 12 months?
And the second query is round — we seen that Q-on-Q dividend is additional declined, and the primary half payout ratio is just barely above 40%. That is additionally a lot decrease than final 12 months’s 64%. What can be the dividend coverage for this 12 months?
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Wai Wan Cheang, Dangle Seng Bank Restricted – Vice-Chairman & Chief Government [3]
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On the primary query, can I’ve Andrew, our CFO, for the reply? After which I can discuss dividends.
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Wing Lok Leung, Dangle Seng Bank Restricted – CFO [4]
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Okay. Yafei, the online curiosity margin was declining in the course of the first half of 2020. For the primary quarter, the online curiosity margin was round 2.13%. And on the second quarter, the online curiosity margin was 1.8%. So demonstrating the softening of the market rate of interest within the second quarter, specifically, in direction of the top of, say, May and June and additional coming into July, truly, the rates of interest continued be dropping, disclosed within the determine. On the finish of June, the 1-month HIBOR was 44 foundation factors. However on the finish of final week and as we speak, the 1-month HIBOR was solely 25 foundation factors. So the, say, exit web curiosity margin may not have totally mirrored the continued drop within the excessive protection or the interbank fee within the second half of the 12 months.
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Wai Wan Cheang, Dangle Seng Bank Restricted – Vice-Chairman & Chief Government [5]
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I’ll reply the questions concerning the dividend insurance policies. To begin with, our dividend insurance policies are decided by numerous elements, together with profitability, regulatory requirement, progress alternatives and likewise the ahead financial outlook. For this 12 months, the uncertainty and the problem of COVID-19 has convey the worldwide economic system into unprecedented problem.
And I do know a number of the different regulators, the bank regulators in Hong Kong has notified banks to droop dividend cost. Nevertheless, they’ve cautioned us that we must be conserving capital to fulfill the potential challenges and likewise assist the economic system in Hong Kong. And subsequently, the Board permitted the $0.80 second quarter interim dividend for the bank, and including as much as $1.90 for the primary half. The bank’s capital place continued to be robust. We’ll proceed to evaluation our dividend cost for the remainder of the 12 months. And if the scenario improves and/or deteriorate, we are going to modify the dividend accordingly. So hopefully, we are going to proceed to generate long-term sustainable returns for our shareholders.
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Operator [6]
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The following query is from Jemmy Huang from JPMorgan.
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S. Huang, JPMorgan Chase & Co, Analysis Division – Monetary Analyst [7]
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Additionally, two questions from me. The primary one is on asset high quality. Simply — might you tell us how additionally the asset a part of the migration on the quarter-on-quarter foundation within the first quarter and likewise second quarter?
And in addition, Louisa, I believe that you just talked about round $82 million loans you could have supplied for the — prepared program. Any shade when it comes to the asset high quality situation for this specific portfolio? That is the primary query.
Second query is that if I calculate the risk-weighted asset density, which is the entire danger weighted asset divided by your complete property, I believe it is growing. And in addition the RWA progress can be greater than the entire portfolio progress. So we expect these are, [popularly], density modifications, is there something associated to the loan downgrade, and subsequently, growing in danger weights for EBT or loan segments consequently?
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Wai Wan Cheang, Dangle Seng Bank Restricted – Vice-Chairman & Chief Government [8]
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Thanks, too. I believe each questions must be tuned by CRO, Chee.
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Yeo Chee Leong, [9]
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Proper. Thanks. Okay, on the asset high quality, there are some deterioration within the second quarter. For those who discuss with the ECL, stage 1 transferring to stage 2 is round HKD 294 million. The stage 2 transferring to stage 1 is $237 million. So there is a web motion of about HKD 57 million.
Having mentioned that, the quantity isn’t very vital in comparison with the general loans and advances. As you’ll be able to see, if we additionally have a look at how we classify investment-grade versus noninvestment grade. As of 30th of June, investment-grade portfolio represents about 62% of our ebook, and sub investment-grade is 37%.
By way of the motion, it is truly round 1.7% transferring from investment-grade to subinvestment grade.
On the opposite query on the RWA over complete property. RWA has truly additionally elevated simply very marginally. Whole credit score RWA elevated by about 5.5% in comparison with the top of final 12 months. However on the similar time, the entire publicity default has additionally elevated by about 4%. So you will notice that the rise in credit score RWA is definitely largely — a part of the reason being because of the enhance in loans and advances and the rise in our capability, as a consequence of credit score deterioration, can be fairly marginal.
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Wing Lok Leung, Dangle Seng Bank Restricted – CFO [10]
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After which possibly Let me make I can complement that. The chance weighted asset in complete truly elevated by 4.3% as in comparison with the top of final 12 months. Principally, the loan progress, one of many driver into the growing the credit score RWA.
However there’s one other RWA enhance attributable to — sorry, the credit score migration. The associated RWA enhance associated migration was $6.5 billion, which is amounting to 1.2% of the entire RWA.
Different elements that additionally result in enhance in RWAs referring to the market danger RWA arising from the rate of interest and FX positions in our treasury operation. So apart from that, the general enhance is RWA remains to be manageable. It doesn’t count on any, say, materials concern that we should always convey to your consideration.
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Operator [11]
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We now have Nick Lord from Morgan Stanley.
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Nicholas Lord, Morgan Stanley, Analysis Division – Head of ASEAN Banks Analysis and Government Director [12]
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Can I simply come again on web curiosity margin? And I am simply making an attempt to grasp. I imply you mentioned clearly that our exit NIM, you gave a Q1 and a Q2 NIM, and also you mentioned the exit NIM on the finish of Q2 was decrease. I simply marvel in case you might possibly give us a quantity on that. After which might you simply speak slightly bit concerning the asset repricing? So I do know a whole lot of issues are occurring in the mean time. A number of banks are seeing a rise in liquid property, which is driving down web curiosity margin. So I simply questioned in case you had been saying the identical factor. And are these accelerating the tempo of asset repricing? And in case you might give us form of the repricing period so we might work out possibly what the affect could be in 2021 then as properly.
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Wai Wan Cheang, Dangle Seng Bank Restricted – Vice-Chairman & Chief Government [13]
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Andrew, please.
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Wing Lok Leung, Dangle Seng Bank Restricted – CFO [14]
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Okay. Once more, for the online curiosity margin, simply to repeat that the primary quarter web curiosity margin was 2.13% and the second quarter web curiosity margin was 1.8%. So that’s the exit web curiosity margin for the second quarter.
Regarding the asset repricing, it is a little bit sophisticated due to, say, a number of the principal moratorium and likewise aid measures that we’ve got granted to the debtors. So it is possible that the negotiation might be accomplished upon the, say, expiry of the principal vacation. We predict that for the (inaudible) — the credit score pricing will nonetheless be very tight due to the competitors for high quality loans.
On the SME, due to the heightened danger, that is probability truly, we are going to reprice the portfolio with the intention to, say, we’d — to compensate for the extra danger that we’re taking. However to this point, we’re seeing, say, basically, extra strain on the general low pricing. As a result of banks are extra geared to take up extra high quality loans. So we aren’t very, say, optimistic concerning the numerous enchancment within the margin.
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Operator [15]
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The following query is from Gurpreet Sahi from Goldman Sachs.
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Gurpreet Singh Sahi, Goldman Sachs Group, Inc., Analysis Division – Fairness Analyst [16]
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I’ve this query concerning the loans and the deferrals, so cost deferrals or any form of moratorium. To begin with, are you able to present a quantity, possibly I missed it in the course of the presentation as to how a lot of the entire loan ebook is uncovered to such sort of moratoriums and any cut up? After which second is there are talks round extending the moratorium past October. So what are the ideas from the end result, the bank administration, can be useful to know.
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Wai Wan Cheang, Dangle Seng Bank Restricted – Vice-Chairman & Chief Government [17]
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Effectively, I believe possibly, Chee, you’ll be able to reply the primary one?
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Yeo Chee Leong, [18]
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Positive. A complete of two,600 buyer has been granted loan moratoriums, inside which, Private Banking represents about 900 and the steadiness in wholesale banking. By way of loan quantity, Private Banking-wise, mortgage is 275 — I urge your pardon, sorry, when it comes to the Private Banking, mortgage quantity is $2.5 billion. For nonmortgage, it is $668 million. So complete is about $3.2 billion. So wholesale is — the quantity is $78.Eight billion. So when it comes to complete quantity versus our complete loans and advances is lower than 10%.
Close to the enlargement, we’re in dialogue with HKMA on the additional extension. Particulars aren’t finalized but. However we are going to strive our greatest to assist our clients as a lot as we are able to. However on the similar time, we’re dedicated of the credit score high quality that we must keep.
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Wai Wan Cheang, Dangle Seng Bank Restricted – Vice-Chairman & Chief Government [19]
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I agree with Chee Leong. There will definitely be — sure think about sure trade, sure group of consumers which can be most very affected by COVID-19, however it may not be throughout the board. So we’re relying on how the HIBOR conditions evolve within the subsequent month or so.
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Operator [20]
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We now have Steven Chan from Haitong Worldwide.
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Steven Chan, Haitong Worldwide Analysis Restricted – Government Director [21]
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I’ve three fast query. To begin with, concerning the anticipated credit score loss, what quantity of that’s associated to administration overlay? That is the primary one.
And second one is, I believe we’ve got seen web loss for related firm, and also you talked about that can be associated to revaluation deficit of some funding property. And I double checked your affiliate firm, just one firm is the place — is , proper, that known as [Barrel Gate] funding, however we should not have a lot information for that. As a result of for the previous few years, we’ve got by no means seen that occuring. So simply wish to know, might you give extra shade about this related firm Barrel Gate .
And what is the measurement of the funding property on this firm? So that is the second query.
And third query, on the optimistic facet, we’re seeing fairly good progress in your Mainland China revenue. I simply wish to understand how you — what’s the important thing earnings driver of this progress for the China working revenue? And what’s your outlook on your Mainland China operation within the second half?
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Wai Wan Cheang, Dangle Seng Bank Restricted – Vice-Chairman & Chief Government [22]
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And I am going to have Chee Leong reply the primary questions concerning the administration overlay. After which CFO will reply the questions on Barrel Gate and I am going to come again to China.
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Yeo Chee Leong, [23]
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Okay. On the ECL overlay, for the primary half of this 12 months, the ECL calculation is slightly bit completely different from what we’ve got accomplished in earlier years. Up to now, what we’ve got — what we do with our model is that we’ve got a central situation after which a prime facet situation and a down facet situation.
From second half of final 12 months, you may recall that we’ve got a second draw back situation, which is what we name extra down facet situation. After which we based mostly — based mostly on that situation to do an adjustment, which is what we referred to as the overlay.
For this 12 months, it’s a little bit completely different. This 12 months, we created Four situations like what we have accomplished previously. However all of the Four situations goes into to the engine to generate an anticipated credit score loss. There isn’t any some so-called [met-up] already per se.
Having mentioned that, with the output, we additionally — we have a look at the reasonableness of the output. After which we apply what we name further credit score adjustment utilizing identify by identify, sector by sector strategy to have a look at whether or not the adjustment within the ECL is cheap. That adjustment is used to match in opposition to the model and make appropriate adjustment in there.
If I break down the online ECL, the $1.76 billion within the ECL change for the primary half, 51% or $904 million pertains to stage 1 and a pair of. Inside which, roughly about half of which might be referring to the extra down facet situation.
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Wing Lok Leung, Dangle Seng Bank Restricted – CFO [24]
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Okay, Steven, again to your second query, seeking to the main points of the related firm. The related household firm is funding property holding firm. In order of the, say, funding of the holding firm is a chief workplace constructing, along with some retail pressure in Causeway Bay and we personal 24% of the associated firm, and so it will likely be fairness accounted for. As a result of it’s an funding property, so the accounting coverage for the affiliate firm might be valued, the funding property, frequently and any service on arising from property devaluation or deficits might be taken to the P&L.
And due to the — commerce is gentle and likewise the, say, retail gross sales, affect by the COVID-19, you’ll be able to see that a whole lot of the property analysis in Hong Kong to this point are in deficit. And that was additionally the case in our, say, affiliate firms throughout the property. And due to the fairness contact, we additionally shared a loss arising from the reversion deficits of associated properties.
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Wai Wan Cheang, Dangle Seng Bank Restricted – Vice-Chairman & Chief Government [25]
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After which the third query is about China. Though the entire contributions for China to our entity efficiency was nonetheless comparatively small for first half, I am happy to see the expansion in China. Amidst that — they’re additionally — they’ve additionally gone by the COVID-19 challenges. The expansion is principally pushed by, initially, the expansion of the entire property, which is 7.9%, each loan and deposits has good progress.
Second, very prudent management when it comes to bills to make it possible for we even have a year-on-year discount from bills. There’s additionally a big enhance in ECL as just like the Hong Kong scenario. However with the expansion in buyer relationship and likewise the entire property, it has been in a position to drive an 11% enhance in backside line. One other issue that additionally have an effect on the nice efficiency of China is the robust collaborations with the Hong Kong staff. We mainly have a whole lot of purchasers overlapping with one another, so we perceive their portfolio and have been in a position to management the credit score high quality, which is a vital issue for doing enterprise in China. We have now truly these days launch a service that permit clients which have account in each Hong Kong and China to have the ability to see your balances and likewise will earn cash on-line. So these are a number of the issues that we’ll be growing with the intention to construct a a lot tighter relationship with our Mainland operation.
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Operator [26]
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And now we’ve got Alex Zhou from UBS AG.
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Huanan Zhou, UBS Funding Bank, Analysis Division – China Financials Analysis Analyst [27]
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My query is a fast follow-up on the asset high quality. We noticed fairly a big enhance when it comes to the stage 2 publicity. May I verify whether or not that’s primarily pushed by the loans on the moratorium?
And the second factor is that if I have a look at the ECL protection for the stage 2 publicity, that appears to be — to have been diluted considerably within the first half. So how ought to I make up this form of decrease ECL protection ratio for the stage 2 publicity? And if the stage 2 enhance was pushed by the loans on the moratorium, may I ask on the work subsidences, which you form of downgrade additional these publicity to stage 2 or enhance the ECL protection for the 6 quarters.
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Wai Wan Cheang, Dangle Seng Bank Restricted – Vice-Chairman & Chief Government [28]
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Chee Leong, please.
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Yeo Chee Leong, [29]
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Okay. On the asset high quality stage 2, the rise in stage 2 isn’t primarily because of the moratorium that we supplied. We have now accomplished an evaluation. The ECL affect from the moratorium at present may be very minimal. However of this enhance in stage 2 are some clients transferring from stage 1 to stage 2. However when it comes to the asset high quality, they continue to be very passable.
Only for reference, the property beneath good ebook in our wholesale portfolio, it nonetheless represents 99% of our complete wholesale portfolio. And in comparison with the top of final 12 months, the change may be very, very marginal. After we have a look at downgrade to stage 3, we are going to carefully monitor the conduct, and we create automobiles to assist with our clients. We continually do evaluation of the credit score high quality, and if we expect that the — a selected loan isn’t anticipated to be repeat, we are going to — in response to the accounting coverage, we are going to modify to stage 3.
Your different query on the ECL protection. Only for comparability, if we have a look at common stage Three ECL within the final Three years, the present stage 1 and a pair of balances for Hong Kong is about 6.8x, and for China is 3x. If we have a look at the final 12 months, web ECL is a rolling 12 months, ECL — stage Three ECL. At Hong Kong, we’re taking a look at 2.8x and China 13x. So we really feel that the present ECL protection remains to be very acceptable.
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Wing Lok Leung, Dangle Seng Bank Restricted – CFO [30]
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Your sentiment, Alex, your query concerning the protection ratio for stage 2 appears to be lowered within the first half as in comparison with final 12 months. That was as a result of when there are some stage 1 migrations to stage 2. A few of these stage 1 clients truly are superb clients. So regardless that they may be migrated to Part II, they related ECL protection must be decrease than the common of the entire stage 2 portfolio. So it’s going to dilute the ECL protection ratio for the stage 2 portfolio.
Reminded that the classification of stage 1 and stage 2 aren’t relying on absolutely the chance of the [forbearance edges] relying on whether or not there’s vital enhance in credit score danger. And for superb clients, there may be some slight modifications within the, say, grade resulting in the migration to stage 2. However the associated ECL will nonetheless be very low, regardless that they’re transferring to stage 2. And that is the explanation why these migrations will dilute the general protection for the stage 2 ECL proportion.
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Unidentified Firm Consultant, [31]
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Thanks, gents. Thanks, Louisa. This may convey our annual session of the 2020 interim outcomes to an in depth. Thanks, everybody, for becoming a member of us. Thanks.
