HSBC Research: USD Deposits Surpass HKD Deposits for the First Time in Second Half of 2025; HKEX, BOC Hong Kong, and Bank of East Asia Favorable

The analyst rating from UBS is based on several factors: 1. Improved Net Interest Income: The report highlights that the average one-month HIBOR has increased, providing strong support for banks' net interest income. It is expected that Hong Kong banks' net interest income in 4Q25 will surpass that of 3Q25, which is a positive indicator for the banks' financial performance. 2. Cautious Outlook on Credit Risks: Despite the positive outlook on net interest income, UBS cautions about rising non-performing loan risks, particularly in the context of renewed market concerns over China's commercial real estate sector. This has led to an increase in credit cost forecasts for specific banks. 3. Focus on 2026 Earnings Prospects: UBS maintains a cautious outlook for Hong Kong banks moving into 2026, indicating that net interest income and credit costs will be key drivers of performance. 4. Target Price Adjustments: The ratings of Neutral for BOC HONG KONG and BANK OF E ASIA were reiterated, but target prices were lifted due to a reduction in equity costs following the Fed's rate cuts. Overall, the rating reflects a balance between the positive impact of increased net interest income and the potential risks associated with rising credit costs.

The analyst rating is based on several positive indicators regarding Hong Kong's financial sector. The report from HSBC Global Research highlights robust deposit inflow and southbound equity inflow in September, suggesting strong investor interest. Additionally, loan growth appears to have stabilized, supported by higher Hong Kong Interbank Offered Rate (HIBOR), which benefits the net interest margin (NIM) of Hong Kong banks. Furthermore, there is ongoing momentum in fee income. These factors contribute to a bullish outlook on HKEX, BOC Hong Kong, and Bank of East Asia, leading to their ratings as "Buy."

The analyst rating from HSBC Global Research is based on several optimistic factors regarding the outlook for domestic Hong Kong banks. Key reasons include: 1. Improving Net Interest Margins: As the Hong Kong Interbank Offered Rate (HIBOR) rises, the net interest margin outlook for banks is expected to improve, which is a positive indicator for profitability. 2. Strong Demand for Wealth Management and Insurance: There is a sustained demand for wealth management and insurance products, which can contribute to revenue growth for banks. 3. Capital Return Perspective: The perspective on capital returns remains intact, suggesting that banks are likely to continue providing returns to shareholders. 4. Growth Potential in Total Shareholder Return: The broker sees growth potential in total shareholder returns for BOC Hong Kong and Bank of East Asia, particularly as they can capitalize on opportunities in wealth management. 5. Valuation Comparisons: The valuations of these banks are still below those of local and regional peers with similar net asset returns, indicating potential for upward re-rating. Overall, these factors led HSBC Global Research to lift target prices for both banks and maintain a "Buy" rating, reflecting a more optimistic outlook for their performance.