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On Thursday, Goldman Sachs analyst Gurpreet Singh Sahi changed the rating of Hang Seng Bank (11:HK) (OTC: HSNGY) from ’Sell’ to ’Neutral’ and also increased the price target to HK$112.00 from the previous HK$98.00. The bank, currently valued at $25.17 billion, has demonstrated resilient financial performance with a 6.33% revenue growth in the last twelve months. The adjustment comes after a period of underperformance relative to its peers, with Hang Seng Bank’s shares dropping by 22% since being added to the Sell List on February 1, 2023. This decline contrasts with a 4% rise in the Hang Seng Index and a 32% average increase among Hong Kong banks excluding HSBC.
The rationale behind the upgrade is attributed to the stock trading near what Goldman Sachs considers trough valuations, which may reflect market concerns about asset quality risk. The valuation basis used for this new rating is Price to Pre-Provision Operating Profit (P/PPOP), with the stock currently trading at around 7 times, compared to a mid-cycle average of more than 10 times. According to InvestingPro data, the stock trades at a P/E ratio of 11.42x and appears slightly undervalued based on their proprietary Fair Value model. The bank maintains a strong dividend yield of 6.11%, having consistently paid dividends for 34 consecutive years.
Furthermore, there has been a significant reduction in the formation rate of new non-performing loans (NPLs) in the second half of 2024, which has fallen from approximately 5% to around 1% on a half-over-half basis. InvestingPro analysis shows the bank maintains a GOOD overall Financial Health Score of 2.91, with particularly strong marks in profitability metrics. Subscribers can access 5 additional exclusive ProTips and detailed financial health analysis. The bank’s Hong Kong commercial real estate (CRE) portfolio, which is predominantly secured, with two-thirds of the total being secured at around 50-60% loan-to-value (LTV), is also highlighted as a positive factor. The remaining CRE loans are to listed companies, and the coverage for NPLs with collateral is stated to be over 100%.
Goldman Sachs anticipates that Hang Seng Bank’s NPL ratio will reach its peak during the year, owing to proactive management efforts to mitigate risk and a stabilization in the cash flow of CRE borrowers. This outlook has contributed to the more favorable view on the bank’s stock, leading to the upgrade and the revised price target. The bank’s next earnings report is scheduled for April 28, 2025, where investors will be able to assess the progress of these risk mitigation efforts.
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