HKMA reported loan growth in June at 15% YoY, 10% YTD - Banks continued togrow loans at a very fast pace, some of this was evident in HSBC / HSB results. Anumber of investors' view is that it is increased borrowing from the mainland thatis driving this growth. However, in loan breakup (available every quarter - Exhibit10) we can see that the growth is fairly broad based. Loan for use outside HK(primarily mainland related) was up 12% HoH.
However, loans for use in HK was up 9% HoH with strong growth acrosssegments. Trade Finance was up 8% HoH; Transportation (should beinfrastructure related) was up 15%; Manufacturing up 10%; Mortgages up 7%;Financials up 38%; Consumer (ex credit cards) up 20%. There was fairlywidespread demand. We are not assuming that growth retains this pace, butgiven pickup in nominal growth - we think it could stay above 10% for some time.
There have been other periods of loan book growth in HK since 2008 – butalmost every time, this was against the backdrop of contracting NIMs. This is thefirst time since 2007 that we see strong loan growth along with NIM expansion.
This is a very strong tailwind for bank earnings, driving our OW on HK banks andmaking them our top group within our Asian banks portfolio, despite the verystrong YTD performance.
Deposit growth was also strong at 12% YoY - HKD deposits were up 16.4% YoY(9% YTD). This had been running ahead of the HKD loan growth at 14.8% YoY,but in June HKD loans grew faster than deposits taking HKD LD ratio to 77.1%from 75.9% in May. In our view, this needs to continue for HIBOR to start movingup. Till then HIBOR is likely to remain suppressed, affecting proper NIMdiscovery. On the positive side, strong deposit growth adds to Interest EarningAssets Growth, implying stronger NIM's.
We maintain our Attractive view on HK Financials: NIM's at large HK banks willlikely continue to improve as excess liquidity on the balance sheet starts earningmore. The surge in volume growth adds to this NIM move, implying fairly strongNII growth. Cyclically, these banks are also benefiting from strong markets, whichtakes up fees income. We prefer the large banks with BOCHK being the top pick.
Our other preferred stocks are HSBC and HSB.
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