Hong Kong banks:Mortgage growth continues to slow

Event

    The HKMA released December 2013 mortgage data for the HK bankingsector. Mortgages (as represented by outstanding stock) ended 2013 with a 4.2%YoY gain, or half of 2012's pace of 8.4% YoY. This extends the slowing YoY pacethat began in April 2013 (after peaking at 10.1% YoY in March).The slowdown inmortgages was within our expectations, as the various cooling measuresintroduced last year took hold. However, overall loan growth has proven strongerthan we expected due to the rapid rise in foreign currency loans that weresupported by trade finance and corporate FC borrowing.

    Looking back to 2013, we expected system loan growth to slow to a mid singledigit pace for the year following a slower 9.6% YoY rise in 2012. We believed thatthe recent drivers of overall loan growth -- mortgage and trade finance -- wouldslow further and pull overall loan growth down. In this regard, we were half right -mortgages did slow; however, trade finance accelerated.

    Looking into 2014, we are expecting loan growth to slow to a single digit pace of8% for the 5 HK banks under our coverage. We believe mortgage lending willremain subdued, on the basis of recent residential transactions. However, for theupcoming year, we also believe trade finance will finally slow, given our outlook forslower economic growth in China.

    Impact

    Mortgage loan growth slowed in December. Outstanding mortgages slowed ona MoM basis (0.1% vs 0.2% in Nov13 and 1.3% in Dec12) and on YoY terms(4.2% vs 8.4% in Jun13). We believe housing loan volumes will remain subdued,due to the various cooling measures introduced in 2013 as well as a weakeroutlook for capital values (-10% in prices for 2014).

    Newly approved loans decreased. Newly approved loans saw MoM decreasesin both value (-7.3%) and volume (-10.2%).

    Other factoids. Asset quality hasn’t been an issue for housing loans in years,with the mortgage delinquency for more than 6 months at 0.01% as well as therescheduled loan ratio at 0.0%. Loan to value ratio was 54.1% -- higher than2012's 52.4%. We note that loan approvals related to the primary market haveslowly moved up to 28.6% from the 7.2% in Jul13 (the lowest level since Jan11).Finally, Hibor based pricing was 35.9% in Dec13 (vs 36.8% in Nov13 and 9.3%in Dec12).

    Outlook

    The slowing mortgage volume trend came in in line with our expectations. Webelieve housing loans will remain subdued and serve to dampen overall loangrowth, as housing loans accounted for 20.6% of total loans and 35.0% of ‘loansfor use in HK’ as of 1H13. As of 1H13, Wing Hang Bank, Hang Seng Bank, andDah Sing Financial gained mortgage market share among the 5 HK banks.

    Nonetheless, our outlook for generally weaker volume growth in 2014 partly leadsto our blanket Underperform call on the HK banks. We continue to hold that theHK banks have (and will continue to) structurally derated on the back of moreintense competition, which we think may intensify should volume growth slowsharply.