2 big ways Hong Kong banks will be affected by interbank rate hikes

Is RMB liquidity tightness a good thing?

According to Barclays, they believe Hong Kong banks are affected by higher onshore and offshore interbank rates in two ways: 1) via offshore RMB business in Hong Kong; and 2) via their Mainland banking subsidiaries.

CNH business – initially positive from higher return on CNH interbank placements, CNY interbank access quota and CNH-Hibor based loans, but partially offset by higher CNH time deposit cost.

Here's more from Barclays:

RMB liquidity tightness is initially positive for the Hong Kong banks, in our view, especially for BOCHK due to 1) a higher return on excess liquidity, which is placed in the onshore (subject to a quota) and offshore RMB interbank market; and 2) upward repricing of CNH-Hibor based loans. Although overtime, this benefit may be eroded by rising funding costs on growing deposit competition led by the Mainland banks' Hong Kong subsidiaries.

BOCHK has a large proportion of funds placed in cash and interbank placements, which together account for 52% of interest earning assets in 2012. Yield on some investment securities (e.g. corporate bonds) may also increase, reflecting high cost of credit. Loans priced on CNH-Hibor will also likely rise.

Together, we estimate ~70% of interest earning assets are sensitive to either onshore or offshore interbank rates, exceeding interbank rate sensitive liabilities, which only account for 60% of IEA (assuming 30% of BOCHK’s CNH deposits are CASA deposits). A 1% rise in RMB interbank rates will likely result in 1.4% higher FY13E pre-tax profit for BOCHK, on our estimates, assuming a full year effect. However, we note that interbank rates have been elevated for a few weeks only so far.

In terms of future growth of CNH lending, with the exception of BOCHK where loan to deposit ratio is low (27% in 2012), Hong Kong banks are operating around 70-80% CNH loan to deposit ratio including trade bills. Therefore, we see limited scope for CNH loans to grow unless CNH deposit base can expand. Although CNH loan yields may benefit if banks gradually shift loan mix from trade bills into higher yielding term loans.