BOC Hong Kong Holdings Ltd

HKEX:2388

Earnings Call Transcript 2019-Q4

[Nan Luo, executive]

Ladies and gentlemen, good afternoon. Welcome to 2019 Annual Results Briefing of Bank of China Hong Kong Holdings Limited. I am Kenny Luo, Company Secretary. Due to the epidemic situation, today's meeting will be held in the format of webcast and conference call. We apologize for any inconvenience for you.

Now let's kick off our meeting. First, I would like to introduce our senior management who are with us today: Mr. Gao Yingxin, Vice Chairman and Chief Executive; Mme. Wang Qi, Deputy Chief Executive; Mr. Zhuo Chengwen, Chief Credit -- Chief Risk Officer; Mr. Yuan Shu, Deputy Chief Executive; Mr. Zhong Xiangqun, Chief Operating Officer; Mr. Wang Bing, Deputy Chief Executive; Mr. Qiu Zhikun, Deputy Chief Executive; Mme. Sui Yang, Chief Financial Officer; Mme. Kung Yeung Yun Chi, Deputy Chief Executive.

Today's meeting has 2 parts. First, CE Gao will make a brief opening remarks followed a video to review our strategy implementation and financial results in 2019. Then there will be a 30 minutes Q&A session as usual.

Now let's welcome CE Gao.

[Yingxin Gao, executive]

Good afternoon, ladies and gentlemen. Thanks for attending our result briefing at this special moment.

In 2019, the bank's operation and the management endured challenge from complicated and external environment and internal strategic transformation. Thanks to support from our customers, shareholder and friends from media and all constituents of the society, Bank of China Hong Kong overcame various difficulties and achieved satisfactory performance as a result of solidarity and unremitting efforts of our staff. We made remarkable progress in key strategy implementation, such as digital transformation and Southeast Asia business development. The overall operation remains sustainable and prudent.

I would like to take this opportunity to express my deepest gratitude to all of our customers and friends from all walks of life who offer long-term care and support to us. Special thanks to our staff who contributed great dedication during the social unrest and the ongoing epidemic and deliver outstanding performance.

Taking this opportunity, I'm also very pleased to introduce to you our new Chief Risk Officer, Mr. Zhuo Chengwen. Welcome back with us.

Now let us begin our 2019 annual results introduction.

[Presentation]

[Nan Luo, executive]

Okay. Hope you like this video, which will also be uploaded on our website.

Now let us open the floor for Q&A session [Operator Instructions] Now operator, please give us the first question.

[Operator]

[Operator Instructions]

[Nan Luo, executive]

[Operator Instructions] Operator, please give us the question.

[Operator]

Okay. The first question comes from Goldman Sachs.

[Gurpreet Sahi, analyst]

Can you hear me? This is Gurpreet from Goldman Sachs.

[Nan Luo, executive]

Yes, what's the question?

[Gurpreet Sahi, analyst]

Yes. My question is regarding the COVID-19-related impact on the asset quality. Have you seen any impact year to date on the borrower regarding payment difficulties? And how is the management working with the borrowers to work through this difficult situation right now?

[Nan Luo, executive]

[Foreign Language]

[Yingxin Gao, executive]

[Interpreted] I will answer this question briefly, and then our Chief Risk Officer will answer the question in full. Now since the outbreak of the coronavirus in Hong Kong in few industries, the small- to medium-sized enterprises, restaurants, tourism, et cetera, they have been greatly impacted. In their operation and the business, there had been certain difficulties. And for many of these difficulties, these are temporary because they are affected by the epidemic.

For us, our bank, together with other banks in Hong Kong, we have launched some measures in face of this. I have already introduced that there are certain measures, for example, for them to postpone the payments of their principals on their loans, for instance. So this is to alleviate some of the pressures off them, and this is very helpful for the borrowers to help them go through this patch. As of now, even though these industries have been greatly impacted, but overall speaking for our bank, for our quality of our loans, it is fine. There is no major numbers of borrowers which have experienced difficulties. Even though in their business and operation, I know they're experiencing difficulties, but there are no serious problems with regards to repayment. And also, you would know, for our bank, our loan portfolio for SMEs and the industries concerned, especially for the impacted industries, the proportion is, relatively speaking, not so big. And therefore, for overall quality of our loans and our overall borrowers in terms of their payments, there had not been major changes so far.

Yes. Mr. Zhuo?

[Zhuo Chengwen, executive]

[Interpreted] Thank you, Mr. Gao. I will supplement on 2 points. The first point. The impacted customers, especially Mr. Gao mentioned the few industries that are greatly impacted, we have ongoing monitoring of them. And we very often communicate closely with these customers. And in particular, concerning their repayments capability and their operation, we try to understand them in full. And also, we have a list for any early warning. And also, there would be measures for lowering of risks.

A second point is that in our reserve, especially for our ECR modeling, we will also follow very closely the market and also indices on the market and economy, and we update those very closely to adjust our reserve level.

[Nan Luo, executive]

[Operator Instructions]

[Operator]

[Foreign Language]

[Unknown Analyst]

[Interpreted] I have 2 questions. The first question is as follows. For this year, we see that for the risk assets is higher in terms of growth than our total assets. In our present level of capital, which is relatively high, my question is, would you be considering, for example, if indeed this year is impacted by the epidemic, then for our NIM and also slowing of our profits, given that situation, would you maintain the dividend payout ratio per share? So that is the first question.

A second question is for the Asia Pacific region. What is your strategy? Can you give us more information about this? At present, what is the total assets or total loans? What is the amount there? And given the epidemic or pandemic situation, how do we see the Asia Pacific or Southeast Asia business?

[Yingxin Gao, executive]

[Interpreted] Regarding the first question, I'm going to ask the Chief Risk Officer to take it.

[Zhuo Chengwen, executive]

[Interpreted] Thank you very much for your question. Now if you look at the growth of our asset, now concerning the growth of the asset is around 6.5% for the year, this is mainly because of credit risk increase, and that's about 6%. And so the indicator is really still manageable.

And if you look at our overall indicators, our Tier 1 and CET1 asset ratio are still at a very good level. And concerning Tier 1 and Tier 2 core capital adequacy rate, it is still increasing. And so in terms of our overall capital utilization, we are making use of limited capital to make investment on organic growth. And so this is a good development.

In terms of payment of dividend, in total, now because of the reduction of interest by the FDR, it is more than expected. And in March, the interest rate is now close to 0, and so that has an impact on our NIM, N-I-M. So we have to make sure that we have sufficient liquidity and also our asset lending ratio is still reasonable. And so we have to control the growth in deposit and savings cost so as to reduce the pressure on the continual sliding of NIM. We hope that we can maintain the dividend payout rate to between 40% to 60%.

And in terms of the present payout rate, we believe that it is good both for our shareholders as well as the bank. And so we have no plans to change it.

[Yingxin Gao, executive]

[Interpreted] I would just like to supplement that concerning the dividend because it's between 40% to 60%, and this year, it's at 50%. I believe that given the present circumstances, we have the room for maneuver to reach 50% of dividend payout ratio.

And secondly, you mean -- you mentioned the growth in Asia Pacific region. BOC Hong Kong actually has to look at 2 aspects with regard to Asia Pacific region. First of all, we are the hub for syndicated loans, for the BOC parent company for Asia Pacific region. And BOC Hong Kong is also looking at the Asia Pacific portfolio as part of our overall business. And for Southeast Asia, our lendings and our asset will account for around 5% of the total. And so there is still a lot of room for growth. And you can see that from last year. Basically, for Southeast Asia, the growth in various areas actually is promising. And if you look at the development in the past 2 years and also the potential, we should be able to maintain the growth momentum for Southeast Asia.

As for the Asia Pacific region, excluding Southeast Asia, because BOC Hong Kong really is the Asia Pacific hub for the parent company BOC, and so we are the flagship operator here. And in this regard, we will continue to support major enterprises in China to continue to develop in Asia Pacific region and in Southeast Asia, and we will look for opportunities for mergers and acquisition, so that we'll continue to look for growth opportunities.

[Operator]

[Interpreted] The third question is from [ May Lee ].

[Unknown Analyst]

[Interpreted] Can you hear me?

[Unknown Executive]

[Interpreted] Yes.

[Unknown Analyst]

[Interpreted] I've got 2 questions. Regarding provision and the [ CPM ] model, because in the second half of last year, investors have been most concerned about social unrest in Hong Kong, and so they are questioning whether your macro arrangements have been cautious enough and prudent enough. Now concerning the epidemic, which is a black swan actually, is something that was unforeseen a month ago. So I'd like to know, in terms of your ECL model and your provision model, whether you are going to make major changes. So are you going to adjust your ECL model now? Or are you going to wait until the macroeconomic outlook is clearer?

And now the FDR -- now this is a second question. The FDR has very rapidly reduced interest rate to a very, very low level. And of course, this will put pressure on your NIM. And so my question is, what is going to be your take on the 2020 development of NIM? Are we going to go back to the situation in 2015 and 2016?

[Yingxin Gao, executive]

[Interpreted] Thank you for your questions. Mr. Zhuo will answer your first question.

[Zhuo Chengwen, executive]

[Interpreted] Thank you for the question. About the ECM model, in the second half of last year, the macro situation and the operation situation had certain special conditions. And we have put this into the ECM modeling in terms of GDP growth, the unemployment rate, the price of properties and also other factors and elements, we have included those. And this is very prudently and cautiously considered as a whole.

In 2019, for impairment expenses, because it had -- because of the consideration of these factors, there had been about 400 million in terms of impairment. Now with the pandemic, it is a new situation. We will closely look at the situation and continue to monitor the parameters and also the factors considered in the model. And with the employment, corporate earnings and also the economic situation, they will be further affected by government policies and the epidemic. So we will be looking at the macroeconomic development, and we will be adjusting appropriately our ECM modeling factors considered. And in terms of our provisions, this may add increased pressure to a certain extent. But for provisions, I think this kind of adjustment is good and necessary. And some of the adjustment may happen in the first quarter. And after that, there will be continuous adjustments according to our reading of the economy and the developments.

[Yingxin Gao, executive]

[Interpreted] All right. We will have the second question answered by CFO.

[Yang Sui, executive]

[Interpreted] For NIM, as mentioned, in the March period, Fed had already [ decreased ] the rate to 0% to 0.25%, and economists are saying that given the present situation, it is not likely that U.S. will go for negative interest rates. So in the next few months, it will still be around 0% to 0.25%.

For Hong Kong dollar interest rate, especially in the period of -- recent period of time, we see that the liquidity and the interest rate and corporate activities, dividend payout, IPO, all these will cause volatility, bigger volatility. And therefore, the Hong Kong dollar interest rates, in the long term, we see that this will be affected by the lowering of U.S. dollar interest rates. But in the short term, I think it will still be higher than LIBOR still. And we feel that for this year, for the Mainland, the PBOC will continue with QE to support the economic growth. So the RMB liquidity will also be relatively loose, and the interest rate for RMB would be stable. So from this overall picture, for interest rates to go up and down is something that is a given. And yes, this is a challenge for banks.

As for our strategy in view of this, because you have not asked this question and that is about our loan growth. Now according to our own situation, we will continue to focus on high-interest loans, the growth of that. And also, we'll be allocating our assets to high-interest assets. And also, we will compressing our deposit cost. These are important work for us. We will try our best to grow our deposits, and we'll have a number of measures. For example, our new business and our fund pools business, we will optimize these, so as to meet the demands and needs of our customers. And also for deposit pricing, we want there to be good management so as to lower the NIM impact.

[Operator]

[Foreign Language]

[Unknown Analyst]

[Interpreted] I have 2 questions. The first question is about the quality of our assets. If you look at second half of last year and the changes there, in the Mainland, Hong Kong and Southeast Asia, we see NPL increasing. Can the management share some information, please? And that is for the customers that we have, would you say for Hong Kong companies or Mainland companies, the asset quality change is rather big? And also for virtual banking, there is one that had already launched in terms of operations. So my question is, for our bank and our observation of our customers, how do you see the -- how do you see our business being affected by virtual bank operation? Do you see any changes in the behavior of their customers, for example, in deposits? And also, for our own virtual banking, is there any difference in terms of the strategy of operation compared to the peers?

[Yingxin Gao, executive]

[Interpreted] Thank you for your question. Question number one will be answered by Chief Risk Officer. Thank you.

[Zhuo Chengwen, executive]

[Interpreted] Thank you for your question. Regarding our asset quality. If you look at the NPL rate in 2019, towards the end of 2019 compared to previous year, there was a slight increase. According to our analysis, the increase was attributable to individual companies, so mainly a Mainland company affected by its business in Southeast Asia, but we have not seen systemic risk coming out of it. And so we are still confident in the overall asset quality of ours.

And if you were to separate Mainland China from Southeast Asia, for Mainland China, non-bank exposure of the bank is around 0.21% in terms of NPL rate. And this is mainly because we've been very prudent in selecting industries and also in customers, and we have selected only leading players and leading industries in Mainland China.

As for Southeast Asia, the average rate is higher than the group -- overall group rate. And also, our asset quality in Southeast Asia is also better than required by the regulators in those areas. And also, we see that the NPL cases are, more or less, fragmented, and so there is no systemic risk either. We believe that in individual industries, such as leisure industry as well as tourism industry and catering industry, we believe that they'll be more impacted by the epidemic, and that's why we are going to effect even more stringent supervision and monitoring over those industries. That's my answer.

Regarding your second question, actually, it is in 2 parts. Because of the opening of the virtual banking operation, is it going to have a big impact on Hong Kong's traditional banking operators? At this point in time, this particular virtual bank that has just started operation in Hong Kong, we have not seen very obvious impact from this new virtual bank on traditional banking businesses, such as savings and lendings.

And as for our own virtual banking, what kind of strategy it will adopt? Will it adopt the same strategies as the other new virtual bank and also to launch, more or less, the same products? I'm going to ask Mr. Zhong to give you the answer.

[Xiangqun Zhong, executive]

[Interpreted] Thank you. Regarding virtual banking, of course, this is something you are concerned about. I think various virtual banks are now under very active preparation, and they've got their own focuses on customers and also on products. Our product in the initial period will still mainly be convenient and also safe. And those will be our focus areas. And we will be even more penetrative, and we are going to target more the day-to-day operation of our customers. And we are going to use that as the principle to guide the launch of our products and the launch of our services.

And to supplement what Mr. Gao said, what is the impact on traditional bank from virtual bank, I think you have to look at the long run. I think traditional banks will have to digitalize more. If you look at the present numbers, in the present moment, our smartphone banking as well as our e-banking services are growing very, very fast. If you look at it from another angle, the growth in our young customers actually has been very marked when compared to the same numbers previous years.

[Operator]

[Interpreted] Next question from Bank of America.

[Unknown Analyst]

[Interpreted] My first question is this. We can see that many American companies and enterprises are having cash flow problem, and so their banks are drawing down their line. I'd like to know whether you see the same situation in Hong Kong. Is there an increase in lendings because of liquidity crunch? And if so, what is going to be the take of yours in the way forward? And do you believe that there is going to be a big impact?

In 2008, many banks' book value has been very severely affected by the financial tsunami in terms of stocks and bonds because their investment portfolio has been eroded by the financial tsunami. Do you believe that the same is going to happen this year?

[Yingxin Gao, executive]

[Interpreted] Thank you for the questions. For the first question, Mr. Wang will answer the -- Mr. Wang of our Corporate Banking will answer that question.

[Bing Wang, executive]

[Interpreted] Thank you for your question. For this year, because of the epidemic, the international financial market have been very volatile. For our bank, for our operation, there is no pressure on our liquidity. And for our business development, it is actually normal for this year. If you're asking about the entire year, what is our positioning, well, you have seen it from the video just now. Now because of trade conflict between the U.S. and China, and because of Hong Kong social situation, there had been difficulties in 2019. But we have outstripped the peers by increasing by 0.33%. And as we increase our loan growth for Hong Kong use loans and outside of Hong Kong use loans, we have outstripped the peers in the Hong Kong area as well. And also for Southeast Asia, it has grown 200% and more. So given this, we have the following targets. Now first of all, the background is that we have a very good customer base. And also, we have very good strategy in terms of our market allocation and also, thirdly, because of our business capabilities.

Well, for this year compared to last year, it will be even more difficult, as far as I can see. But I think that in the recent period of time, the countries all over the world, whether it's the central banks or governments, they have come up with monetary policies and quantity easing, so as to inject more confidence and stimulation into the economy. And so as the situation continues to recover, I think there will be more and more effect coming from this combo policies.

And for capital and demand, the relationship between the 2, we will dynamically monitor that to increase our loan growth. Overall, for the entire year, we will have mid- to high single-digit growth. And for Hong Kong, our customers in terms of large, medium to small size, we have a very good balance, and given that, we will be able to further extend our business.

As for cross-border business, for example, for the Mainland, the strategy in the Mainland had given us great opportunities. For example, the Yangtze Delta region, the Greater Bay region and also the Beijing-Tianjin-Hebei region had also given us opportunities. And also, infrastructure is also another area. And also, 5G infrastructure and also AI, big data, and also rail, transport, et cetera, all these are major focuses for us going forward. So I hope for cross-border loans, we will have even better performance.

Now for Southeast Asia, as Mr. Gao had mentioned, we have already been developing this for a few years. Our regional business strategy had been very stable. And for the headquarters in Hong Kong and Southeast Asia institutions, we have had synergistic cooperation and growth. And this capability will continue to go into belt and road projects or major family-owned businesses or major corporation businesses that are local in Southeast Asia. We will develop these, and also for Southeast Asia and APAC syndication hub, so as to increase our support in terms of syndication and also project financing and also look for support acquisitions and mergers opportunities. So overall, we are confident.

[Yingxin Gao, executive]

[Interpreted] Let me just supplement one point. For the U.S. dollar liquidity situation, in the U.S. market, there is pressure. And some of our customers, corporate customers in the ForEx and also U.S. dollar demand, there had been increase of loan demand. Yes, we feel that, too. Yes, we see that situation, too, increased demand for loans.

Now in the past 2 days, because globally, especially for the U.S., the government and the Fed had provided great packages to stimulate the economy, and so there is amelioration of the liquidity situation for loan demand stemming from liquidity. Well, some of the corporations in the past have been issuing debt, but they may come to the banks to draw down lines instead. So given that, as mentioned just now, given our liquidity situation, our diversified customer base and our overall business strength, we will be able to manage our risk well and also to maintain our revenue. And on this basis, we will try our best to satisfy the demands and needs of our customers.

You had a second question, and that is on investments. Would you want to answer that question? And [ Ms. Lyn ] will supplement.

[Unknown Executive]

[Interpreted] Well, first of all, thank you for the question. For our securities investments for our bank, 2019 balance was HKD 86 million plus. And the market have been affected by the liquidity situation and also the spread. And therefore, the market price had come down. And the past 2 days, it had gone up again in terms of securities market price. As for our securities investment in terms of the issuer and the quality of our securities, it is good. About 90% is A3, that is Moody's A3 or above in terms of our bonds. So the credit there is good quality.

Now for issuance. 60% is government issuer or supranationals. So for this type of bonds, the price had not been greatly affected. And further, for securities investment in our portfolio, over 90% is in terms of investment intention. It is for stable income. So this is for stable income and given that the recent fluctuations would not affect us much. And secondly, we very much pay attention to the credit quality of the issuers. If that can be kept stable, then I would think we will continue with our hold intentions. We will not change. And going forward, we will continue to pay attention to the market situation.

For our ForEx and bond portfolio, for bonds over 50% is U.S. dollar bonds. And for market liquidity, this would be very strong, indeed. And so this is my sharing with you concerning our securities investment. Would you want to supplement?

[Unknown Executive]

[Interpreted] Yes, I have a couple of points. Now Citibank asked a question just now. And we have all gone through the 2008 financial crisis, haven't we? So for our bank, in the past few years, for our securities investment, we have adopted a stable and prudent approach. And just now, my colleagues have already spoken to this. And this over 800 million investment portfolio, 80% are government-issued bonds. So these are interest rates linked, and a small proportion is credit issuances. And the issuers would be big insurance companies, banks and also major corporations. These are the issuers. So there are 2 sides to this. For credit issues, yes, the price has suffered lately, but because the interest rate had quickly come down, we also have a lot of interest rate bonds. Which have not suffered at all. So overall speaking, our portfolio is in good position.

[Nan Luo, executive]

Due to the time limit, today's annual results briefing has to stop here. Should you have any further questions, please contact with our Investor Relations team. Thanks for your participation, and see you next time.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]