How Hong Kong banks are benefiting from spiking US interest rates

HSBC, BOCHK, Wing Hang Bank  top analyst's pick.

According to Barclays, banks benefit from more net interest income initially as interest rates rise. In this report, it looks at other potential consequences, including system liquidity, deposit competition, loan growth, asset quality, property prices and offshore RMB growth, including stress-testing our estimates under upside and downside scenarios. 

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Overall, we find that the earnings of Hang Seng Bank (UW) and HSBC (OW) would benefit the most from rising interest rates. However, our economics team does not expect the first US interest rake hike until “beyond 2014”, and therefore, we keep our estimates unchanged.

Our top Hong Kong banks picks are HSBC (OW), BOCHK (OW) and Wing Hang Bank (OW).

• Margins to increase: Banks’ net interest income and margins should rise on wider loan-to-deposit spreads and higher returns on surplus funds, in our view.

• Liquidity outflows: Liquidity/capital inflows into Hong Kong since the financial crisis in 2008 may reverse, driving system liquidity tighter and deposit costs higher.

• Credit growth: Credit growth could be strong as the US and global economy recovers although this may be offset by weaker loan demand as borrowing costs rise.

• Asset quality normalises: Currently record-low credit cost and non-performing loan ratios may move in line with rising borrowing costs for corporates and households. 

• Property prices: The liquidity-driven property price rally may correct, resulting in revaluation losses on investment properties as well as slower commercial and residential loan growth.

• RMB business: As the interest rate differential closes between the HKD and RMB, CNH asset deployment may rise, but loan demand by Mainland companies may fall if Hong Kong is no longer a cheaper funding centre relative to the Mainland.