Secondary listings by Mainland firms to weigh on liquidity

Large IPOs in the pipeline and reduced aggregate balance still make liquidity conditions volatile.

The 1-month and 3-month HIBOR have retreated from their recent high to 2.18% and 2.36%, respectively, due to some easing in liquidity tightness. According to OCBC Investment Research, this suggests that the impact of large initial public offerings (IPOs) on liquidity has moderated.

However, with other large IPOs in the pipeline for 2H2019 and a reduced aggregate balance, OCBC’s research team said that they are cautious on the overall liquidity conditions in Hong Kong and believe that volatility is here to stay.

“Secondary listings by mainland China companies in HK could pose short-term funding pressure for the HKD,” they said, adding Alibaba’s intention to raise more than US$10b from a secondary listing.

Moreover, the reduction of the aggregate balance is likely to put further upward pressure on HKD funding costs, which has come down to $55b (compare to $79b at end-December 2018 and $110b in July 2018).

“As such, the HIBOR is likely to stay at a relatively high level in the near term and a rising HIBOR should be positive for HK banks’ net interest margin, especially for the big banks. Having said that, an elevated HIBOR also suggests liquidity is tighter and competition for deposits should be on the rise, putting further upward pressure on funding costs for HK banks,” OCBC Research Team said.

Notably, the performance of Hong Kong banks has diverged against the macro backdrop. Loan demand has remained subdued in light of US-China tensions, with total loan growth as of May 2019 at about 2% YoY on a 3-month moving average basis.

“Meanwhile, big banks have also proven that they managed to deliver a higher loan growth than the system during previous downturns owing to their funding advantages and other company-specific drivers. We believe the upcoming 2Q2019 earnings should have support from an improving HIBOR level,” the team said.

Current forward rates suggest market consensus is expecting around 50-75bps rate cuts in the next 12 months, OCBC Research Team said. “We expect Hong Kong banks’ net interest margin (NIM) to peak in 2H2019 with a slower pace of NIM expansion owing to potential Fed rate cuts, weaker credit demand, and a higher deposit beta as and when banks compete for deposits on the back of tighter liquidity.”

“The expectation of peaking NIM and rising credit costs from a relatively low level suggests that profitability for HK banks should have peaked with the rate cut cycle kicking in,” the team added.