Offshore RMB business to benefit Hong Kong banks

Banks have gathered solid RMB deposits.

Standard Chartered has declared that it remains positive on Hong Kong banks because of their positive gearing to rising rates, limited vulnerability to capital outflows and strong capital positions.

According to a research note from Standard Chartered, the performance of HK banks is highly correlated to US interest rates.

A fall in rates to near-zero levels starting 2010 crushed deposit-side margins and therefore bank NIMs.

However, Standard Chartered now expect interest rates to rise starting 3Q15 and bank margins to expand as a result. It believes HSB and BOCHK will be major beneficiaries of an interest rate hike because of their low-cost deposit base.

In addition, Standard Chartered expects Hong Kong banks to benefit from offshore RMB business. Hong Kong banks have accumulated substantial RMB deposits. However, their RMB loan to deposit ratio (LDR) remains low.

Here's more from Standard Chartered:

We therefore expect bank margins to improve as further policy easing leads to better cross-border RMB deployment.

We expect BOCHK to be a key gainer because of its leading position in RMB business. We remain cautious on HK banks’ exposure to China corporates and HK property, but expect the impact of this exposure on profitability to be manageable, given strong underwriting standards and low mortgage loan-to-value (LTV) for HK banks.

BOCHK remains our top pick, mainly because of its defensive business (widest customer reach, leader in mortgages and best cost efficiency) and leading position in the RMB business.

We are also positive on HSB because it has the highest leverage to rising rates and profitability upside from a potential disposal of its IB stake.

Even without the disposal, we believe HSB will be able to satisfy the CET1 requirements by 2018E without lowering dividends.