UBS: Maintains a cautious view on local Hong Kong bank stocks, raises target prices for BOC Hong Kong (02388) and Bank of East Asia (00023).

UBS released a research report stating that looking ahead to 2026, they maintain a cautious view on Hong Kong banking stocks. They expect the market focus to shift towards the banking sector's profit outlook next year, with net interest income and credit costs being the main driving factors. They currently predict that BOC HONG KONG (02388) and BANK OF E ASIA (00023) will have approximately the same net profit growth in 2026, with projected dividend per share growth of 2% to 3%. They reaffirm a "neutral" rating for BOC HONG KONG and BOK OF E ASIA, with target prices raised to 40 Hong Kong dollars and 13.5 Hong Kong dollars respectively, to reflect lower equity costs after the rate cut. In the context of the Fed rate cut cycle, the one-month Hong Kong Interbank Offered Rate (HIBOR) has rebounded, narrowing the spread with the secured overnight financing rate. From the fourth quarter of this year to date, the average one-month HIBOR is 3.19%, 113 basis points higher than the third quarter, providing strong support for banks' net interest income. It is currently expected that Hong Kong banking stocks' net interest income in the fourth quarter will surpass the third quarter level, with market forecasts likely to be adjusted upwards. UBS cautions that despite the improved performance of Hong Kong banking stocks' net interest income, the risk of non-performing loans is also increasing in the second half of the year. Accordingly, they have raised their credit cost forecasts for BOC HONG KONG and BANK OF E ASIA in the second half of the year.