Hong Kong Banks:Getting tighter but not where it was expected;HSB down to Sell;BEA up to Neutral
RMB rates rise while HK$ rates fall.
Despite Dec’16 and Mar’17 Fed rate hikes, 1MHIBOR is down 30bp ytd while 1M SHIBOR is up105bp on a tighter PBOC monetary stance. BEAbenefits the most from RMB rate rises, while HSBbenefits the most from HKD rates. Contrary toconsensus expectations HK loan yields have beenflat to pressured, delaying the $ NIM expansionstory as HK banking system liquidity is stillabundant and outflows haven't started. Whileloan demand is gradually picking up, led by Chinatightening, we believe this is unlikely to bereflected in wider loan spreads any time soon.
HSB down to Sell, BEA up to Neutral.
As a result we are pushing back out $ NIMexpansion expectations for the sector. Coupledwith slightly higher loan estimates and a bettercredit costs trajectory, we trim EPS estimates forHSB while raising them for BEA and Dah Sing.
BOC HK EPS changes are mixed. After changes toour target prices (based chiefly on RIM) that reflectnew EPS we upgrade BEA to Neutral from Sell andlower HSB to Sell from Neutral. We maintainNeutral ratings on BOC HK, DSBG and DSFH.
HSB is low on ‘beta’ relative to the recovery.
HK banking system loan growth is trending up, ledby loan demand from China. Historically, BOC HKand BEA have done more loan growth vs. HSBwhen loan demand has been stronger. That said,we don't think the improvement in loan demandoff a low base would necessarily offer repricingopportunities for HK banks given still abundantliquidity in the system. We expect 1H17/FY17earnings to show most improvement at BEA whileshowing least growth at HSB. In addition, Chinacorporate earnings have improved, which couldbenefit BEA the most on China credit costs givenits higher exposure. Finally, the sector is at midcyclevaluations, thereby making EPS revisionsmore important for share price performance.
What are the risks to our Sell on HSB.
1M HIBOR is at the widest discount to LIBOR sincethe global financial crisis. Outflows from HK orexpectations of this could narrow the discount anddouble HIBOR from a low base — which couldhelp HSB share price given its high, sector leadingEPS sensitivity to HK$ interest rates.