Kate Lin: Welcome to Morningstar. Rising interest rates and reopened borders have made the operating environment favorable for banks. Bank stocks in Singapore are trading higher, even as the region is a step ahead of others in reopening its economy. Are Singapore banks better than their Hong Kong counterparts? Michael Wu, senior equity analyst at Morningstar, has some thoughts.
Hi, Michael.
Michael Wu: Hi, Kate.
Lin: So, Singapore and Hong Kong banks share similar growth prospects in Asia. How have their differing COVID relaxation approaches impacted their operations?
Wu: Yes. So, for the banks, the lockdowns had a larger impact mainly on the noninterest-related income – so, fee income in wealth management, insurance products and credit cards. So, having its domestic economy reopened earlier, the fee income for the Singapore banks have pretty much recovered to pre-pandemic level. Credit card volumes, for example – the relationship managers go out and meet their customers, so more complex insurance products can be sold, and wealth management fees have generally picked up. So, we expect the same trend for the Hong Kong banks in the second half as the domestic economy is now reopened. But the key for Hong Kong banks is the relaxation of border restrictions with mainland China.
Lin: Right. As U.S. interest rates have increased, how have that impacted the banks in Hong Kong and Singapore so far this year?
Wu: It's positive overall. But again, it's at a different pace like the noninterest income. So, the interbank rates in Singapore reacted quite early to the Fed interest rate increase. So, the Singapore banks did have that benefit flow through in higher net interest margin in the second quarter, and that will continue to flow through in the second half of this year and into 2023. For the Hong Kong system, because there was a lot of liquidity in the banking system, the interbank rate, or HIBOR, did not pick up meaningfully until June of this year. So, we do expect that to benefit them in the second half. Offsetting this is rising deposit costs, which is reflected in higher rates in terms of fixed deposits across both Hong Kong and Singapore. There will be also a transition from current and savings account deposits to time deposit as well. But for the banks under our coverage with strong deposit franchise we do expect the increase in asset yields from the repricing of loans to be much more meaningful, and that should offset the rising funding costs, and that should lead to higher net interest margin for the banks.
Lin: Right. So, on the fundamental side, how are the banks trading right now and what are some of the top picks from these markets?
Wu: Yes. So, I think the rising interest rate story is well understood by the market. But we think that the earnings certainty that it brings for this year and into 2023 is underappreciated. We do acknowledge that there is a risk of slowing global growth next year, but the Asian region should continue to show better growth relative to developed markets. We think any pickup in terms of credit costs and risk to asset quality is manageable. For some banks, there is also that inorganic growth coming through in 2023.
So, one of them is DBS Group (D05), our preferred pick in Singapore. Off the three banks in Singapore, they are expected to benefit most from rising interest rate in both '22 now and into 2023. And the acquisition of Citibank (C)'s operation in Taiwan, that will close in mid-2023, and that provides a bump-up in terms of earning for them. A strong capital position also means that there's likely to be some form of shareholder return at the full year results, so early in 2023.
On the Hong Kong banks, BOC Hong Kong (02388) is our preferred pick. Now, they are less sensitive to interest rate increase compared to their peer Hang Seng Bank (00011). But BOC Hong Kong generally has a greater focus on corporates and businesses, and historically, they do grow above system in terms of loan growth. So, we expect that to be the case going forward as economic growth pick up in both China and Hong Kong as Chinese corporates do return to growth around the region.
Lin: Right. Thank you so much for your time, Michael. For Morningstar, I'm Kate Lin.
.jpg "Kate Lin")
