Hong Kong Banks:Aug'17monetary stats,slowest monthly growth this year

Key monthly trends:

    Both system loans and deposits were largely flat in August 2017, posting theweakest monthly trend so far this year.

    System loans were flat in August 2017up 0.2% MoM (+12% YTD), mainlysupported by loans in HK, up 0.2% MoM (+11% YTD), while offshore loanswere flat (0.3% MoM, +12.5% YTD), as also was total trade finance (-0.1%MoM, +9% YTD). Currency wise, HKD loans grew 0.7% MoM (+12% YTD)and FX lending dropped slightly (-0.3% MoM, +11% YTD).

    System deposits were also flat with a slight drop in August (-0.2% MoM,+6.4% YTD), as HKD deposits fell 0.7% MoM (+10.5% YTD), and FXdeposits grew 0.3% (+2.5% YTD). The CASA ratio was stable at 58% (July:58%). Overall system LDR was stable at 71.7% with HKD LDR at 78%(July: 77%, December 2016: 68%) and FX LDR at 65% (July 65%).

    RMB deposits fell 0.4% MoM (-2.6% YTD). RMB time deposits fell by 1%MoM (-5.6% YTD), offset by RMB savings deposits growing 1.5% MoM(+6.6% YTD), with the proportion in time deposit funding dropping to 73%(peak: 85% in September 2014). Offshore RMB deposits now account foronly 5% (5.1% in July) of the system total (peak: 12.8% in March 2014).

    The residential mortgage survey showed outstanding mortgage loansrising 0.5% (+5.3% YTD); mortgage approvals dropped 11% MoM, andloan drawdowns fell 13% MoM. New loans priced with reference to HIBORfell slightly to 95.4% (July: 95.9%).

    The composite interest rate decreased by 1bp MoM to 0.30% at Augustend(July: 0.31%). Our deposit cost check with sample HK banks inSeptember 2017showed both HKD and RMB deposit rates rose slightlyMoM for all tenors but are still off from this year’s high level in June.

    Short rates largely remained steady during the quarter until recently…

    During 3Q17, the average 1M/3M HIBOR were 45bp and 76bp (-2/-13bp vs.averages in 1H17), which has continued to widen vs. 1M/3M USD LIBORduring the quarter, now by 79bp/55bp (Figure 1). To soak up excessive liquidityin the system, the HKMA announced HKD40bn additional issuances ofExchange fund bills in mid-September; the 1M HIBOR has reacted by steadilyrising to 58bp; it has widened by 11bp since the announcement (Figure 2).Though the sustainability of such should support margin, history shows littlepositive correlation between 1M HIBOR and HK banks’ share prices.

    Already pricing in key positive trends; unattractive valuations

    The sector currently trades at 15x P/E, 1.8x P/B and 2018E 12% RoE, whichdoes not look attractive to us and already prices in the potential benefits of ratehikes. Post reporting 1H17results in late August, the best performer in thesector in September was HSB (+6%), the worst performer was DSF (-6%); inthe first eight months in 2017, the best performer was BOCHK (+44%), and theworst was DSF (+8%). Within HK banks, we retain our Sell calls on BoCHK andBEA while DSB and DSF remain Buys, resting on undemanding valuations –0.9x/0.8x P/B and10x/ 9x P/E and 9.5%/9% 2018E RoE. Our TPs areGGM/SOTP-based. Downside risks: 1) severe property price correction; 2)significant asset quality deterioration. Upside risk: significant earningsimprovement on rate hikes.