- Interest rate hike in HK may be higher than expected in 2H22, benefiting HK banks
- Expect HK economy recovery in 2H22 to support loan growth and asset quality
- Weak CNY/HKD and better stock market outlook in 2H22 supportive of HK bank performance
- Valuation still attractive; prefer BOCHK (2388 HK) to HSB (11 HK) with BUY on both
HK interest rate hike might be higher than expected. HK banks’ share performance is highly correlated with US and HK interest rate movements. While HK interest rate hikes usually lag US movements by a few months, and the aggregate balance remains high now, we expect the HIBOR might rise faster than expected, with signs that the HK interest rate swaps (IRS) and 12M-HIBOR are increasing sharply. Our house view expects the 1M-HIBOR to reach 2.28% by the end of the year.
Looking for steady HK economy recovery in 2H22. Our house view expects a 1.7% y-o-y growth in HK GDP in 2022, among the higher end of the government’s guidance of 1%-2%. HK banks will benefit from 1) loan growth: We expect a steady 5%-6% y-o-y loan growth in HK, despite higher interest; and 2) improving asset quality. Also, the relatively weaker CNY/HKD is also supportive to HK banks’ performance. Fee income was largely affected by the market volatility in 1H22, but we expect it to show a recovery trend in 2H22. We expect more expansion potential in 2023 for HK’s GDP recovery and cross-border business, with border reopening the potential catalyst.
Positive sector view and prefer BOCHK (2388 HK). Overall, we are positive about the HK banking sector, as we have a positive outlook on its primary share price drivers and expect a recovery in ROE and profit growth in FY22/23F from the low base in FY21. We believe the positives are not yet fully priced in, given the sector is still trading below its five-year average. Among the names we cover, we prefer BOCHK (2388 HK) for the best asset quality among peers, and a strong loan growth pipeline. We also recommend BUY for HSB (11 HK), as it is the major beneficiary of the interest rate hike.