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【日期】20130709
【篇幅】PDF29
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201379GS HK Bank.pdf
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1997 déjà vu
We believe asset quality risks for the Hong Kong banks are firmly to the
downside from here. Our updated bottom-up NPL analysis shows (1)
implied NPLs have quadrupled over the past two years and are now the
highest since the Asian crisis, (2) the gap between implied and stated NPLs
is at a 13 year high (3) HK listed corporate leverage is the highest level
since the Asia financial crisis and (4) corporate profit margins are near
cycle lows and still deteriorating.
A troubling set up
Higher asset quality risks are set against a worrisome backdrop - a banking
sector that has grown its riskiest portfolios at twice the system pace and 4X
GDP in the past three years, cycle lows in pre-provision and loan loss
reserve absorption capacity, and several years of little to no credit costs.
Notwithstanding this, we believe asset quality deterioration will most likely
remain an earnings, not balance sheet event (share count dilutive) for
banks. This is based on a relatively benign economic backdrop with the
largest swing factors being: (a) pace and degree of US interest rate
renormalization and (b) tightness of China monetary conditions. We cut
EPS estimates and TPs to reflect these risks and now stand 5%-26% below
Reuters consensus on 2014 EPS.
Go defensive
We remove BOC HK from CL, (maintain Buy), upgrade HSB to Neutral. We
maintain Sell ratings on BEA, WHB and CHB. Big banks (BOC HK, HSB)
with higher NPL buffers, lower SME exposure, seem better positioned than
small banks (BEA, WHB, DSBG, CHB). If history repeats, bank share prices
underperform during the initial phase of tightening, reflecting asset quality
vulnerability which more than offsets NIM improvement.
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