20150727-法国巴黎银行-Between_China_easing_and_US_tightening_44页_1mb

Summary of "Between China Easing and US Tightening" Report

Core Content

This report analyzes the performance and investment potential of Hong Kong banks in the context of contrasting macroeconomic trends: China's monetary easing and the potential US rate hikes in 2015. It emphasizes that the impact of China's easing is likely to outweigh that of US tightening in the second half of 2015, particularly in terms of net interest margin (NIM) and profitability. The report also highlights the importance of capital management in determining return on equity (ROE) for these banks in the medium to long term.

Main Points

• China Easing Dominates: The report argues that China's monetary easing is a more significant factor in the performance of Hong Kong banks than a potential US rate hike. This is due to the high liquidity in Hong Kong and the limited impact of cross-border rate differentials.
• NIM Impact:
  • DSBG is expected to have the most resilient NIM, with minimal impact from China easing.
  • HSB is the key beneficiary of US rate hikes, with a potential NIM expansion of +36bps per 100bps hike.
  • BEA is the most affected by China easing, with a significant NIM compression.
• Capital Management:
  • HK banks are sitting on excess capital, with CET1 ratios ranging from 11.4% to 18%.
  • BOCHK and HSB are particularly affected by this excess capital due to disposal gains and property revaluations.
  • The report suggests that capital reinvestment and special dividends are key strategies to manage this excess capital and improve ROE.
• Fee Income as a Bright Spot:
  • Brokerage and fund sales have been strong in 1H15, offsetting the negative impact of NIM compression.
  • Category B and C exchange participants outperformed the market in terms of turnover, with BOCHK and HSB benefiting the most.
  • Equity fund sales surged by 56% y-y, contributing positively to wealth management income.

Key Information

Bank Performance and Recommendations

ROE Impact from Capital Management

• BOCHK is expected to benefit from the sale of Nanyang Commercial Bank (NCB), which would improve ROE and reduce China asset quality risk.
• HSB is anticipated to distribute its excess capital through a special dividend, which could be reduced if it maintains a higher CET1 ratio.
• Capital reinvestment under the OBOR initiative is a key opportunity for BOCHK.

NIM Sensitivity to China Easing

• BEA is the most sensitive to China easing, with an estimated NIM impact of -14bps per 100bps rate cut.
• BOCHK has a moderate impact of -7bps.
• DSBG is the least affected, with an impact of -3bps.
• HSB is also less impacted, with an impact of -5bps.

Capital Market Turnover and Fee Income

• HK banks benefited from a 93% y-y increase in capital market turnover in 5M15.
• BOCHK and HSB had the highest fee income growth, with BOCHK at +9.3% and HSB at +9.2%.
• Equity fund sales drove the growth in wealth management income, with a 18% y-y increase in gross fund sales.

Investment Thesis

• China Easing is expected to dominate the performance of HK banks in 2015, particularly in terms of NIM compression and ROE pressure.
• US rate hikes could provide a positive impact on HSB and BOCHK, with HSB being the most sensitive.
• Fee income and wealth management are the key drivers for performance in 1H15, especially given the decline in NII due to NIM compression.
• Capital management is a crucial factor for ROE improvement, with BOCHK and HSB being the primary beneficiaries of excess capital.

Risks

• Downside risks include a sharp rate hike that could cause rapid liquidity outflow, increased funding costs, and asset quality deterioration.
• Uncertainty in the timing and details of capital reinvestment and NCB disposal could affect ROE and valuation.

Conclusion

The report concludes that DSBG is the top pick among HK banks due to its resilient NIM, improving core performance, and potential M&A premium. BOCHK and HSB are also considered as potential beneficiaries, with BOCHK focusing on capital reinvestment and HSB on US rate hikes and special dividends. BEA is expected to face pressure due to its high China exposure and limited growth options.