Interim results should provide a reality check for Hong Kong banks.
This is because the credit cost trajectory is far less severe than in
1998-99, capital ratios are improving and the momentum of preprovision
operating profit (PPOP) remains weak.
■
Weak revenue (and PPOP) may temper investor optimism towards the
sector, especially for large banks, given a likely contraction in margins
and fee income. However, we do not see this as a reason to write off
the banks in terms of further share price gains in 2H09.
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We believe revenues are bottoming in 2009 and will begin to show
(slight) positive trends in 2010, before gathering further momentum in
2011. We further expect FY10 NPAT growth and ROE to benefit from
falling credit costs and the writeback of investment losses.
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In our view, BOCHK, DSBG and DSFH offer the best leverage to a
medium-term economic recovery. While BOCHK may have a weak
revenue trajectory in 1H09, its balance sheet is in strong shape and we
see large upside risk to 2010-12 forecasts from potential RMBS writebacks.
DSBG and DSFH are likely to report the worst 1H09 results in
the sector, due to a continuation of elevated credit costs. We see this
as an opportunity to accumulate – we expect peaking SME NPLs and a
benign consumer credit cycle to underpin a sharp decline in
provisioning costs in 2010.