Hong Kong Banks:Dec'17stats,LDR tightened,with increasing funding costs

The HKMA released monetary stats for Dec’17 today, which showed continuedupward momentum in loan growth, rising 1.2% MoM, this time helped by bothdomestic and offshore lending. Deposits grew 0.5%. LDR tightened to 73%(Dec'16: 68%). HK$ LDR, at 82.7%, reached its tightest level since Apr'15 (at78.1%). On the negative side, deposit costs kept rising, with the composite raterising to the highest level in three years.

    System loans grew 1.2% MoM (+16.1% YoY), helped by loans used in HK(+1.3% MoM, +16.1 YoY) and offshore loans (+1.6% MoM, +17.5% YoY).

    System deposits rose 0.5% MoM (+8.7% YoY), resulting in LDR tighteningto 73%, while CASA was stable at 58%. RMB deposits were flat MoM(+2.3% YoY), with 71% in time deposits.

    By sector, 4Q loan growth was driven by three sectors: financialinstitutions contributed half of the absolute QoQ change, while loans toindividuals contributed a third and building and construction ~20%.

    Deposit costs keep rising: HKMA’s composite rate disclosure for Dec’17showed that average HKD funding costs have risen – evident from the6bps rise in composite rate to 38bps, the highest level in the past threeyears (excluding the one-off spike in Oct’17 on IPO funding demand).

    Further, our deposit cost check with sampled HK banks also showedhigher deposit rates for all durations for HKD, RMB and USD. Five bankswere offering USD 12m deposits at more than 2%, with a bank offering aUSD 1-year rate of as high as 2.2%, a differential of 75bp vs. new HKDdeposits. Please refer to Figure 10 for details.

    In Jan, 1M/3M HIBOR fell to 0.93%/1.21% (down 26/9bp MoM), widening thegap vs. LIBOR. In our view, the drop in HIBOR during the month has removedsome of the pressure on banks to raise the P-rate in the near term.

    Nevertheless, with the likelihood of higher rates in the US this year and atighter LDR to start the year, we need to keep an eye out for a potential pick-upin the Prime rate later this year, which puts more pressure on property prices,in terms of sentiment, and leads to slower growth or even the unwinding ofcredit lines previously used to buy WM products, asset quality risks for theSME book and higher cost-of-funds pressure.

    HK domestic banks’ share prices underperformed the HSI by 10% and MSCI HK by5%, with HSB, the key underperformer in the sector, correcting 4% during themonth, while DSBG/DSF were relative outperformers among peers. As noted inour recent outlook piece, while higher interest rates may favour margin expansion,greater new loan competition and rising deposit costs may reduce the positivetransmission into NIM. We remain cautious on HK banks, with Sell ratings on largedomestic HK banks while the Dah Sings remain our top picks on what we see asundemanding valuations.