Hong Kong Banks:Oct'17stats,Deposit growth still lags behind
HKMA's latest stats showed a significant pickup in lending, helped by IPOactivities, outpacing deposit growth by 1.1% in Oct. LDR further tightened to73% (Dec'16: 68%), the highest since Mar'15. Because of tighter liquidity fromIPO and LDR, the key negative was that the average cost of funds also spikedsignificantly, which could dilute margin benefits from higher rates.
HK domestic banks’ share prices underperformed the HSI by 10% and MSCI HK by5%, with HSB, the key underperformer in the sector, correcting 4% during themonth, while DSBG/DSF were relative outperformers among peers. As noted inour recent outlook piece, while higher interest rates may favour margin expansion,greater new loan competition and rising deposit costs may reduce the positivetransmission into NIM. We remain cautious on HK banks, with Sell ratings on largedomestic HK banks while the Dah Sings remain our top picks on what we see asundemanding valuations.
Tighter liquidity and rates – Are deposit costs due to pick-up?
Already pricing in key positive trends; unattractive valuations
Share prices not factoring in potential increase in cost of funds?
By sector, 4Q loan growth was driven by three sectors: financialinstitutions contributed half of the absolute QoQ change, while loans toindividuals contributed a third and building and construction ~20%.
The composite interest rate remained flat MoM at 0.30% by the end of Sep(Aug: 0.30%). Our deposit cost check with sample HK banks in Oct’17showed that deposit rates largely remain the same MoM with the USDrates having ~50bp differentials. Please refer to Figure 7for details.
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).
In the past week, HK banks have risen 4% (outperforming the HSI by 6% andthe MSCI HK by 4%) on the back of a higher HIBOR, media reports about astock connect crackdown and potential rotation from tech names. BoCHK hasrisen the most, as it had been a laggard since its results, underperforming theHSI by 6%. We stay cautious on HK Financials, with Sells for BoCHK, BEA andHKEx. Dah Sings remain our only Buys, on discounted valuation vs. peers. Webelieve the market has largely ignored that a higher HIBOR/tighter LDR canalso lead to a higher cost of funds, diluting the margin benefit, notwithstandingthat HK Banks stand low in GP buffer in case of asset quality deterioration.
Deposit costs keep rising: HKMA’s composite rate disclosure for Dec’17showed that average HKD funding costs have risen – evident from the6bps rise in composite rate to 38bps, the highest level in the past threeyears (excluding the one-off spike in Oct’17 on IPO funding demand).
Sector-wise, QoQ domestic loan growth was driven by corporate property( 3.4% QoQ), FIs ( 5.9%) and loans to individuals (total: 2.9%,mortgages: 2.2%, unsecured: 5.4%), together contributing to 93% ofloan growth.
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%).
Key monthly trends (rates, loan/deposit growth, deposit cost)
System loans grew 1.2% MoM ( 16.1% YoY), helped by loans used in HK( 1.3% MoM, 16.1 YoY) and offshore loans ( 1.6% MoM, 17.5% YoY).
RMB deposits increased slightly by 0.5% MoM (-2.1% YTD). RMB timedeposits fell by 1.6% MoM (-7.1% YTD), offset by RMB savings deposits,growing 6.2% MoM ( 13.2% YTD) with the proportion in time depositsdropping to 71.4% (peak: 85% in Sept’14). Offshore RMB deposits nowaccount for 5% (same in Aug) of the system (peak: 12.8% in Mar’14).
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).
mg4355线路检测 ，The HKMA released monetary stats for Dec’17 today, which showed continuedupward momentum in loan growth, rising 1.2% MoM, this time helped by bothdomestic and offshore lending. Deposits grew 0.5%. LDR tightened to 73%(Dec'16: 68%). HK$ LDR, at 82.7%, reached its tightest level since Apr'15 (at78.1%). On the negative side, deposit costs kept rising, with the composite raterising to the highest level in three years.
System deposits were flat ( 0.2% MoM, 6.6% YTD), as FX deposits fell0.9% MoM ( 1.6% YTD), offset by growth in HKD deposits at 1.1% MoM( 11.7% YTD). The CASA ratio was stable at 57.9% (Aug: 57.7%). Overallsystem LDR edged up to 72.4% (Aug: 71.7%), with HKD LDR at 78.8%(Aug’17: 78.3%, Dec’16: 77.1%) and FX LDR at 65.5% (Aug: 64.8%).
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%).
System deposits rose 0.5% MoM ( 8.7% YoY), resulting in LDR tighteningto 73%, while CASA was stable at 58%. RMB deposits were flat MoM( 2.3% YoY), with 71% in time deposits.
ag电子游戏试玩 ， System loans grew 1.1% MoM ( 12.8% YTD) – domestic loans were up0.9% MoM ( 12.4% YTD), offshore loans increased 1.2% MoM ( 13.9%YTD) and trade finance was up 2.2% MoM ( 11.6% YTD). Currency wise,HKD loans grew 1.8% MoM ( 14.1% YTD) and FX lending was flat ( 0.2%MoM, 11.1% YTD).
Both system loans and deposits were largely flat in August 2017, posting theweakest monthly trend so far this year.
Further, our deposit cost check with sampled HK banks also showedhigher deposit rates for all durations for HKD, RMB and USD. Five bankswere offering USD 12m deposits at more than 2%, with a bank offering aUSD 1-year rate of as high as 2.2%, a differential of 75bp vs. new HKDdeposits. Please refer to Figure 10 for details.
HKMA announced monetary stats for Sep'17, with MoM loan growthrecovering from a flattish number in Aug. However, deposit growth failed tomatch the loan momentum, with LDR reaching 72% (Dec'16: 68%), the highestlevel since Jun'15.
Key monthly trends:
In Jan, 1M/3M HIBOR fell to 0.93%/1.21% (down 26/9bp MoM), widening thegap vs. LIBOR. In our view, the drop in HIBOR during the month has removedsome of the pressure on banks to raise the P-rate in the near term.
The residential mortgage survey showed outstanding mortgage loansrising by 0.7% MoM ( 6.1% YTD); mortgage approvals dropped 1.7%MoM and loan drawdowns fell 1% MoM. New loans priced with referenceto HIBOR fell to 93.4% (Aug: 95.4%).
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.
Nevertheless, with the likelihood of higher rates in the US this year and atighter LDR to start the year, we need to keep an eye out for a potential pick-upin the Prime rate later this year, which puts more pressure on property prices,in terms of sentiment, and leads to slower growth or even the unwinding ofcredit lines previously used to buy WM products, asset quality risks for theSME book and higher cost-of-funds pressure.
Key monthly trends:
Short rates largely remained steady during the quarter until recently…
Since HKMA’s mid-Sept decision to issue additional exchange fund bills,totaling HKD40n, as well as quarter-end dressing and IPO activities recently,the 1M/3M HIBOR rose by 37bp/21bp until 31Oct. The discount to LIBOR hasnarrowed to 45bp/42bp (mid-Sept: 82bp/57bp) – Figure 1. Liquidity has beentightening, with HKD LDR being the tightest it has been since Jul’15and FXLDR reaching 65.5% (highest since Apr’00). While this appears to besupportive to margins, we are concerned that the new loans asset yields couldbe lower due to rising loan competition while deposit cost could pick up fromslower deposit growth. The recent BoCHK 3Q17operating trends also showedNIM pressure . As we highlighted in our 2H17outlook note, we believethat although the higher rates are margin-accretive, the earnings benefits willnot likely be linear from higher rates. We stay cautious on HK banks, with DahSings as our only Buy rated stocks on a discounted valuation vs. peers.
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.
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.
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