Investors urged to be defensive as Hong Kong banks hit "inflection point"

After years of solid credit growth.

It has been noted by Barclays that it believes Hong Kong banks have reached an inflection point.

According to a research note from Barclays, after six years of strong credit growth and near-zero credit costs, it believes things are about to change in 2015 as economic growth slows, US interest rates rise, China interest rates fall and asset quality deteriorates.

It noted that investors should position defensively, and Barclays said it continues to prefer Hang Seng Bank, which has the strongest deposit franchise, a solid risk management record and is most leveraged to rising interest rates in the medium term, among local peers.

Moreover, Barclays regards the potential disposal of Industrial Bank as a key positive catalyst.

Here's more from Barclays:

Slower credit growth and higher credit cost: In 2015, we expect a slowdown in loan growth in Hong Kong due to: 1) slower economic growth in China; 2) monetary easing in China which makes credit more easily available onshore; and 3) a higher cost of borrowing in Hong Kong with the recent depreciation of the RMB relative to the USD.

Hong Kong loan growth has historically been inversely correlated with China loan growth. We lower our FY15-16E loan growth forecasts to ~7% (8-8.5% previously). China-related credit quality has shown signs of deterioration. BEA and BOCHK have the largest exposure to China loans, among local peers.

US rate hikes in 2H15: If expectations for US interest rate hikes in 2H15 lead to substantial liquidity outflows, margins could come under pressure in the near term as deposit competition intensifies.
Beyond 2H15, higher benchmark interest rates would be positive for margins, as the loan-to-deposit spread widens, but could be partially offset by slower loan growth and higher credit cost as borrowing costs increase.

Selling Chinese assets: Hang Seng Bank's potential disposal of its 10.9% stake in Industrial Bank, and BOCHK's potential disposal of its banking subsidiary Nanyang Commercial Bank is ROE and capital accretive, in our view.

If so, we estimate excess capital of HK$10.3/share for Hang Seng Bank and at least HK$2/share for BOCHK, which could potentially be paid out as special dividends while still maintaining a 13% core Tier 1 ratio for both banks.