Hang Seng Bank Earnings: Decent Interim Results, but Hong Kong Property NPLs Daunt the Market

We maintain our fair value estimate of HKD 110 per share for Hang Seng Bank, 15% above the current share price and 1.3 times 2024 book value. The shares fell 5.8% July 31 after Hang Seng Bank’s interim earnings report, a reaction we attribute not to the profit numbers themselves—which were reasonably good, in our view—but rather to a near-doubling of nonperforming loans, or NPLs, to 5.3% of total loans as of June 30 from 2.8% of total loans at the end of 2023. Most of the increase in NPLs was attributable to Hong Kong commercial real estate, which accounts for 16% of Hang Seng Bank’s loan book and now accounts for almost 30% of its total NPLs, up from only 4% of the bank’s NPLs at the end of last year (as the NPL ratio for Hong Kong commercial real estate loans rose to almost 10% from less than 1% six months ago).