Expansion Into Wealth Management And Digital Solutions Will Improve Future Prospects

Key Takeaways

• Diversifying revenue through increased noninterest income and wealth management enhances growth potential and net margins due to higher-margin activities.
  
• Effective risk management and digital investment stabilize earnings and support improved shareholder returns by reducing costs and credit risk.
  
• Economic challenges and high nonperforming loans could pressure Hang Seng Bank’s earnings, while real estate exposure and capital inefficiencies pose additional risks to profitability.

Catalysts

Provides various banking and related financial services to individual, corporate, commercial, small and medium-sized enterprises, and institutional customers in Hong Kong, the Mainland of China, and internationally.

• Hang Seng Bank's strategy to diversify revenue streams, particularly through a significant increase in noninterest income, is expected to drive future revenue growth as it has already shown a year-on-year increase of 26%.
  
• The expansion in the wealth management business, with a 22% increase in income, and a notable increase in investment services and life insurance income, suggests potential for sustained growth in net margins due to higher-margin business activities.
  
• The proactive risk management approach and reduction in expected credit loss charges by 24% are expected to stabilize and potentially improve future earnings as the bank manages credit risk more effectively.
  
• Expansion in the affluent customer base and cross-boundary business initiatives indicate potential for increased revenue from both new deposits and wealth management services as customer numbers, especially from Mainland China, experience significant growth.
  
• Continued investment in digital solutions and operational efficiencies is likely to reduce costs and improve earnings, while supporting the ability to maintain or increase dividends, impacting overall shareholder returns positively.

Hang Seng Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hang Seng Bank's revenue will grow by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 48.1% today to 44.4% in 3 years time.
• Analysts expect earnings to reach HK$18.9 billion (and earnings per share of HK$9.93) by about February 2028, up from HK$17.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.8x on those 2028 earnings, up from 11.4x today. This future PE is greater than the current PE for the HK Banks industry at 5.4x.
• Analysts expect the number of shares outstanding to decline by 0.46% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.54%, as per the Simply Wall St company report.

Hang Seng Bank Future Earnings Per Share Growth

Risks

• The sluggish performance in trade and retail sectors, coupled with continued geopolitical and macroeconomic challenges, could hinder economic growth and impact Hang Seng Bank’s revenue streams.
  
• Decreased net interest income, down by 5% due to lower loan demand and a high interest rate environment, may pressure the bank's net margins and overall earnings.
  
• Nonperforming loans (NPLs) were notably high at 6.12%, primarily driven by the Hong Kong commercial real estate (CRE) portfolio and the challenging credit environment; this could lead to increased credit costs and impact earnings if not managed effectively.
  
• Exposure to commercial real estate risks, especially within Hong Kong and Mainland China, creates concentration risk that may threaten asset quality and future profitability if market conditions do not improve.
  
• Potential misalignment between strong deposit growth and weaker loan demand could lead to inefficiencies in capital allocation and affect the bank's ability to grow its earnings through traditional lending activities.

Valuation

• The analysts have a consensus price target of HK$99.43 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$115.0, and the most bearish reporting a price target of just HK$79.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be HK$42.6 billion, earnings will come to HK$18.9 billion, and it would be trading on a PE ratio of 11.8x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of HK$106.8, the analyst price target of HK$99.43 is 7.4% 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.