This is the only Hong Kong bank likely to post growth in profitability

Others are seen to deteriorate.

According to Macquarie Equities Research, within the HK banking sector, it expects only HSBC will post an
improvement in profitability. The other HK banks are expected to see a further deterioration in Operating Return on Assets (OROA), with BEA and DSF forecasted to see the greatest deterioration.

Meanwhile, the banks that Macquarie forecast will generate the highest average OROA in HK are Hang Seng Bank and Bank of China (HK). It also believes the laggards will be BEA and DSF.

Here's more:

The investment theme around banks has been more of a macro call in recent times, and China is no exception. Furthermore, it has gone beyond a local focus, with greater consideration seemingly being given to global macro factors.

Locally, the greatest worries in China seem to revolve around slower economic growth, political and policy direction, and general balance sheet risks.

Globally, the overarching question of developed versus emerging markets, the timeline for tapering, the US debt issue and budget, and the potential recovery of the US and Europe possibly synchronizing with Asia are some of the macro considerations at play.

Revisiting Operating Return Analysis
Despite the macro influence, we attempt to impute a more bottom up differentiation to the banking sector. In line with this objective, profitability remains an integral fundamental underpinning in any investment decision, and as such, would be a reasonable point of distinction.

To this end, we revisit banking profitability using our oft-used Operating Return Analysis (ORA) framework. Under our ORA framework, our preferred focus is Operating Return on Assets (OROA).

In our view, OROA best reflects the profitability of a bank’s inherent operations given that it doesn’t consider the impact of leverage. In some cases, leverage flatters a sector’s or a bank’s, profitability.

For example, high leverage led to the Korean banking sector’s alluring ROEs in the past, and it can even be argued that presently China banks are doing the same.

Conversely, low leverage can dampen profitability, as is the case for the Philippines and Thailand. Also, focusing on operating returns eliminates the distortion created by different tax regimes.