Asian Wealth And Fintech Trends Will Drive Future Value

Key Takeaways

• Rising non-interest and wealth management income, along with fintech-led lending growth, enhance revenue resilience and position the bank for improved profitability.
  
• Expanding cross-boundary client base and focus on sustainable finance strengthen long-term growth prospects and support shareholder value.
  
• Persistent asset quality issues and property sector exposure threaten profitability, revenue stability, and earnings resilience despite diversification efforts and ongoing macroeconomic challenges.

Catalysts

Provides various banking and related financial services to individual, corporate, commercial, and small and medium sized enterprise customers in Hong Kong, Mainland China, and internationally.

• Strong acceleration in non-interest income, with 34% YoY growth (now 31.6% of total income), and robust wealth management and insurance-related income (+43% and +18% YoY, respectively), points to Hang Seng's ability to capture the long-term increase in Asian wealth and rising demand for financial products, driving more resilient revenue and improved profitability.
  
• Significant growth in cross-boundary and Prestige account customers (mainland customer base +20% YoY, Prestige Family Plus new accounts +51% YoY) reflects Hang Seng's ability to benefit from the deepening economic integration between Mainland China and Hong Kong, supporting future loan and fee income growth.
  
• Substantial expansion in trade finance balances (+16% since end 2024) and SME digital lending (+49% YoY) demonstrate Hang Seng's success in leveraging fintech adoption to tap new lending channels and customer segments, likely boosting loan growth and fee income.
  
• Strategic allocation of green finance (70% of HK$80bn Sustainability Power Up fund utilized, first HK green loan issued) aligns with the growing regional demand for sustainable finance solutions, supporting non-interest income and product innovation.
  
• Diversified revenue strategy and growing affluent client base, combined with a strong capital position (CET1 ratio at 21.3%), positions Hang Seng Bank to increase shareholder returns and maintain dividend growth, supporting both earnings stability and investor confidence.

Hang Seng Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hang Seng Bank's revenue will grow by 8.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 41.9% today to 42.4% in 3 years time.
• Analysts expect earnings to reach HK$18.4 billion (and earnings per share of HK$10.04) by about August 2028, up from HK$14.4 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as HK$14.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.9x on those 2028 earnings, down from 15.0x today. This future PE is greater than the current PE for the HK Banks industry at 5.9x.
• Analysts expect the number of shares outstanding to decline by 0.56% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.77%, as per the Simply Wall St company report.

Hang Seng Bank Future Earnings Per Share Growth

Risks

• Elevated nonperforming loans at 6.69%, driven mainly by ongoing difficulties in the commercial property sector, signal sustained asset quality concerns that may lead to further credit losses, higher provisions, and reduced profitability.
  
• A 28% year-on-year decline in profit before tax, largely attributable to increased provisions and expected credit losses, raises questions about the bank's ability to maintain stable earnings in the face of prolonged property market and macroeconomic stress.
  
• The lack of near-term recovery prospects for Hong Kong's commercial real estate market, as acknowledged by management, poses continued risk to loan performance, revenue stability, and net interest income due to potential further defaults and pressured lending margins.
  
• Despite diversifying fee and non-interest income streams, a notable 7% year-on-year drop in net interest income highlights vulnerabilities to low or volatile interest rate environments and weakened loan growth, which may constrain overall revenue and net margins if these trends persist.
  
• Heavy exposure to sectoral downturns in Hong Kong's property market and ongoing high interest rates, combined with the strategic decision against establishing a bad loan bank, could increase future credit risk and limit effective resolution strategies, ultimately affecting earnings resilience and shareholder returns.

Valuation

• The analysts have a consensus price target of HK$105.813 for Hang Seng Bank based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$131.0, and the most bearish reporting a price target of just HK$85.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be HK$43.4 billion, earnings will come to HK$18.4 billion, and it would be trading on a PE ratio of 12.9x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of HK$114.7, the analyst price target of HK$105.81 is 8.4% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.