HK Banks:Unexciting 2H14, HSB is less dragged by China and better leveraged to rising US rates
We expect 2H14 operating performance to remain unexciting for HK banks givenmoderating loan growth, flattish margin and continued asset quality deterioration.The delay of Shanghai-HK Stock Connect means positive earnings contributionwill be postponed, while the implementation of liquidity management under BaselIII could further intensify competition. HSB is our top pick among HK banksgiven more solid asset quality and as a leveraged play on potential rising US rates.
Single-digit profit growth in 2H14. Easing liquidity conditions in China and astrengthening USD have led to diminishing demand/incentives for cross-borderlending and trade finance activities. BEA and Dah Sing should see modest NIMrecovery on easing funding pressure, while BOCHK should experience certainNIM contraction with the unwinding of the higher-yield Rmb portfolio. It isunlikely to see positive surprises on credit costs given continued asset qualitydeterioration in the mainland portfolio. Except HSB, we believe other banks arelikely to deliver only single-digit earnings growth YoY at best in 2H14.
Limited revenue impact from Shanghai-HK Stock Connect. Due to the delayedlaunch of the program and daily quota limits, potential positive impacts on brokeragefees and FX gains, which account for no more than 10% of operating revenue atbanks, should be limited in the near future. BOCHK is able to capture extra businessflows by being responsible for the exchange/settlement of southbound flows, but thepie is shared by other mainland banks and/or their HK affiliates.
LCR implementation to trigger more competition. The initial requirement onliquidity coverage ratio (LCR) of 60% is not an issue for banks in 2015, butprogressive implementation is likely to intensify industry-wide competition inthe medium term by driving banks to deepen customer relationships (so as to getmore stable retail deposits and small business funding or operational deposits)instead of pure deposit-taking, which could lead to higher implicit operating/funding costs.
HSB the best proxy for rising US rates, if it happens. Our sensitivity analysisshows that every 100bps upward shift in the yield curve would result in positiveearnings impacts of 5-18% for the banks under our coverage. HSB is the mostleveraged because of its much higher CASA ratio & lower proportion of Rmbportfolio, of which we expect liquidity conditions may not follow those in the US.Therefore, we see good buying opportunities if the share price pulls back onconcerns/actual recognition of impairment losses related to the Industrial Bankstake in the 2H14 results, which have limited impact on BVPS and capital position.