Hong Kong Banks 2Q14: More cautious on China loans

Reversemigrationfrom RMB to HKD and USD deposits.

    § Shift towards less risky syndicated loans and mortgages.

    § NIM should remain stable albeit rising funding costs.

    What’s New

    RMB depositsfell forsecond straight month.Total RMB deposits (including CDs issued) dropped2.9% MoM to CNY1.13t in Jun2014, accounting for 12.0% of total deposits (12.5% in May2014). This could be due to slow recovery in the RMB exchange rate and increased number ofIPO activities in Hong Kongduring the month. As such, HKD deposits and USD deposits rebounded sharply by 1.8% MoM and 1.0% MoM in Jun 2014. Still, the RMB cross-border trade settlement in Hong Kong grew robustly by 19.8% MoM in Jun 2014. We maintain our forecast that total RMB deposits in HK will exceed CNY1.3t by end-Dec 2014.

    More cautious on offshore loans.Loan growth remained stable at 1.6% MoM in Jun 2014 (+3.6% QoQ in 2Q14). Apart from IPO-related loans, loan growth in 2Q14 was mainly driven by syndicated loans and residential mortgages. Growth in trade finance and offshore loans moderated to 2.2% QoQ and 1.7% QoQin 2Q14. This implies banks have shifted from more risky direct China SME loans to cross-border M&A and working capital loans. Total loan-to-deposit (L/D) and HKD L/D ratio reduced slightly to73.6% and 79.1% in Jun2014(74.3% and 80.3% in Mar 2014). We expect loan growth for listed banks will be 7-11% YoY in 2014.

    Stable NIM on risingfunding costs.To improve HKD liquidity, some banks have been more aggressive in competing for HKD deposits in May-Jun 2014.As such, the average HKD funding costs leaped to 0.38% in 1Q14 and to 0.45% in 2Q14. Still, most HongKong-listed banks expect a stable NIM in 2Q14given the better loan yield. We expect their NIM tomaintain a stable-to-slight-rising trendin 2014.

    What’s Our View

    Maintain NEUTRAL view. We expect core net profit for most Hong Kong-listed banks will grow more than 10% YoY in 2014. However, current valuation of most banks looks demanding. DSB and DSF remain our Top Picks as there is a potentialM&A play for DSB and earnings recovery in DSF’s life insurancebusiness.