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RETAIL BANKING | Staff Reporter, Hong Kong
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Large Hong Kong banks to benefit more from NIM expansion compared with smaller banks: analyst

An analyst gives 3 reasons behind this assessment.

According to UOB Kayhian, the US Federal Reserve increased the FED Funds Target Rate by 25bp in Dec 16. While prime rates in Hong Kong remain unchanged, 3-month HIBOR has risen by 40bp since 4Q16 to the current 0.99%.

UOB Kayhian believes large Hong Kong banks are likely to benefit more from NIM expansion compared with smaller banks for the following reasons:

Lower funding cost makes a major difference. With strong deposit franchise, large banks attract more current accounts and saving deposits, which lead to lower cost of deposit. As of 1H16, current and savings account ratios (CASA ratio) for HSB, BOCHK and BEA were 74.9%, 64.1% and 35.2% respectively. On our calculation, costs of funding of the three banks were 0.42%, 0.71% and 1.75% respectively.

Large banks likely to benefit more from higher interbank interest rate. Large banks are usually net lenders in the interbank market, which means they should benefit more when HIBOR goes up. Under our list, HSB is the largest net lender in the interbank market.

More mortgage loans may shift to being Prime rate-based. Current mortgage rate stands at around Prime-2.85% or HIBOR+1.32% (while some offer HIBOR + 1.30%). As of Nov 16, HIBOR-based (H-rate) mortgages accounted for 95.1% of total mortgages. However, we expect the trend to reverse. Assuming 50% of new mortgages are P-rate based in 2017, we estimate that NIM will expand by 3-8bp for HK banks.

That said, banks have been offering rebate promotions to clients who choose P-rate given the intense lending competition in Hong Kong. As such, only banks with lower funding cost can benefit from the shift to P-rate mortgages. 

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