With HK banks’ reporting season over, we reiterate our positive view on HK banks as they are more sensitive to rising US interest rates among Asian banks. Given a more hawkish Federal Reserve (Fed), we are forecasting seven rate hikes this year, followed by four rate hikes in 2023, lifting the Fed funds rate to 1.75-2.00% by the end of this year and 2.75-3.00% by the end of 2023. We believe this sets a constructive backdrop for HK banks’ net interest margin (NIM) and return on equity (ROE). 1Q2022 average 1-month HIBOR and LIBOR are up on a quarter-on-quarter (QoQ) basis, suggesting HK banks’ NIM is likely to improve in 1Q2022 on a sequential basis. We expect potential upward revision to consensus NIM estimates, and rebounding to the level seen in 2019. HK banks’ ROE is expected to rebound from high single digit last year to low-teens level in the next three years.
Having said that, global and HK domestic economic growth outlook weigh on the sector’s loan growth, fee income and asset quality. Our economist recently downgraded global growth GDP growth forecast from 4.6% to 3.7% mainly driven by severe energy price shock. In HK, consensus real GDP estimate is forecasted to weaken from 6.4% in 2021 to 2.1% in 2022. The macroeconomic softness is likely to be manifested through soft fee income and sluggish loan growth. In our view, 1H22 earnings softness is likely to be well expected and priced-in, asset quality risks should be within control.
We believe this is the time to accumulate position in HK banks on the back of interest rate normalization and attractive valuation. HK banks’ valuation multiple is highly correlated with the UST 10Y bond yield. We prefer HK domestic banks, and our preferred play is BOCHK (2388 HK) on better cost discipline and a relatively more attractive valuation. Among HK international banks, we prefer HSBC (5 HK / HSBA LN) on its attractive capital return. We believe Standard Chartered Bank (2888 HK) is trading at a lower valuation multiple vs. its peers owing to a lower ROE. The stock could potentially see a valuation re-rating if it can achieve its ROTE target of 10% by 2024 but we see as challenging and may take time to unfold. In our view, key risk to our constructive view on HK banks, which is a proxy to rising interest rates, would be if there are any material changes to Fed rate hike expectations owing to macro uncertainties. (Research Team)
