Anil.Agarwal@morganstanley
Irene.Zhou@morganstanley
Attractive
MORGAN STANLEY ASIA LIMITED+
Anil Agarwal
EQUITY ANALYST
+852 2848-5842
Irene Zhou
RESEARCH ASSOCIATE
+852 2848-6526
Hong Kong Financials
Asia Pacific
IndustryView
Hong Kong FinancialsHong Kong Financials
Stage Being Set for a Strong
2018
Large banks had a strong 1H17, but 2H17 has been relatively
lackluster driven by a lack of catalysts and weak 3Q17 trading
update from BOCHK. Underlying trends continue to improve,
which should drive a strong 2018 performance. Recommend
buying into recent weakness. Maintain OW on HSBC, BOCHK
and HSB.
WHAT'S
CHANGED
BOC Hong KongFrom:To:
2017E, 2019E EPS-2%, -0.5%
Hang Seng Bank
2018E, 2019E EPS+1.4%, +1.4%
We expect 2017's earnings and stock performance strength to carry into 2018:
We expect all-around strength in earnings with good loan book progression,
expanding NIMs and strong fees.
1. Loan growth likely to remain strong in 2018: The all-around strength in loan
growth was a positive in 2017. As nominal GDP growth picked up, banks saw loan
demand across sectors, within and outside HK. We expect economic growth to
remain reasonably strong in 2018, which should help loan growth in the high
single digits.
2. HIBOR catch up to help retstart the uptrend in NIMs: Large banks reported
improving NIMs in 2017, but the overall improvement was muted to an extent by
the sluggishness in HIBOR. But HIBOR has increased meaningfully in the last two
months (which should help both loan and deposit margins). Some of the recent
HIBOR increase may abate as IPO-related tightness goes away, but its unlikely
that all the recent increase will subside. Moreover, Fed futures curve is implying
Fed rates at ~1.7% at end-2018, which should also help keep HIBOR high.
3. Fees income progression should remain solid in the backdrop of good loan
growth and relatively stable capital market-related revenues.
We expect asset quality to remain benign and costs to lag revenues, which
should help fairly strong EPS growth in 2018.
Stocks are not cheap compared to recent history, but improving returns should
help them continue to do well: We look at ROCET1 as underlying profitability for
HK banks. Both HSB and BOCHK continue to show improving trends and will be
~20% over the next two years (depending on the pace of HIBOR catchup). We
would expect a rerating given improving profitability, but even if they do not
rerate and maintain current multiples, these stocks could deliver ~20% return.
We stay OW on all the large HK banks ¨C HSBC, BOCHK and HSB ¨C and would
avoid the smaller lenders, where we find it tough to see meaningful
improvement in profitability (vis-¨¤-vis multiples).
Exhibit 1:Current Valuations
2018e2019e2018e2019e2018e2019eBOC HK11.310.01.51.413.2%14.0%
HSB16.615.22.32.214.9%15.4%HSBC*12.511.51.31.29.0%12.1%
P/E (x)P/B (x)ROE (%)
Source: Morgan Stanley Research estimates. Prices as of November 7, 2017.
*Fo
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