Citi: Gradual Fed rate hikes slightly positive for Hong Kong bank earnings; top pick is BOC HONG KONG (02388)

Citi released a research report stating that the Federal Reserve raised interest rates by 25 basis points yesterday, lifting the target range for the federal funds rate to 3.75% to 4%. The median dot plot indicates one more 25 basis point hike this year; the forward curve expects three more hikes through the end of 2027, with a terminal rate projected at 4.5% to 4.75%. The bank believes that the Fed's gradual rate hikes are slightly positive for Hong Kong bank earnings, and BOC HONG KONG (02388) is its top pick among Hong Kong bank stocks. The bank said that, affected by the cap on the mortgage prime rate and the high sensitivity of deposit rates to changes in market rates, it believes that under a high interest rate environment, net interest margin sensitivity has now significantly decreased. However, if U.S. rate hikes exceed expectations and approach 5%, this could be unfavorable for Hong Kong banks, as weakening credit demand and rising asset quality risks may offset potential net interest margin gains. The bank pointed out that HIBOR tends to lag behind Fed rates, and the Hong Kong dollar exchange rate is close to the weak-side Convertibility Undertaking. Despite Fed rate hikes, large banks have relatively large savings deposit balances, and fixed-rate mortgages are widespread in Hong Kong, so banks have a low incentive to raise the prime rate. Recently, under Fed rate hike expectations, deposit competition also appears to have intensified, with more banks offering rates above 3% on 6- to 12-month Hong Kong dollar time deposits. Therefore, even if net interest margins can benefit from rate hikes, the expansion may be relatively moderate. The bank's static analysis estimates that for every 25 basis point increase in U.S. and Hong Kong rates, BOC HONG KONG (02388) and BANK OF E ASIA (00023) earnings would each benefit by about 3.5%. However, if the impact of time deposit migration during the rate hike cycle is taken into account, actual sensitivity may be lower; HSBC HOLDINGS (00005) and STANCHART (02888), due to existing hedges, have lower earnings sensitivity of about 0.3% to 0.4% for every 25 basis point increase.