>HONG KONG BANKS (CITI)

June Loans Boosted by IPO loans, Trade Financing

■ Loans +1.5% mom, loans outside of HK -1.4% mom — Total licensed bank loans grew 1.5% mom, -2.3% ytd in June, mainly due to domestic loan growth (+2% mom) as loans outside of HK (e.g. China) contracted 1.4% mom due to crowding out effects from the Chinese banks. The sequential improvements in economic activities led to an increase in trade finance lending (+3.4% qoq) and due to an active stock market, with increased equity financing in IPOs, stock broking lending increased to HK$49.9bn (434% qoq). Stripping out the effect of stock brokerage lending, we estimate total lending was largely flat mom (c.+0.2%).

■ Recent High in New Mortgage Approvals — The latest residential mortgage survey shows new loans approved in June amounted to HK$38.4bn (+37% mom), which was the highest in recent years. All segments have picked up, with primary mkt approvals up 44% mom, secondary mkt +27% and refinancing +110% mom. Mortgage pricing remains competitive and will likely result in lower banks' margins as 52% of new loans are priced below BLR (e.g. Prime rate) while HIBOR based plans are gaining popularity (c.40% of new loans). Total outstanding mortgage loans reached HK$601bn (+1.2% mom, 2.3% ytd). While some moderate loan growth is expected from mortgages, corporate loan demand and lending outside of Hong Kong will likely remain weak in 2H09.

■ June deposits improved +1.8% mom, +3.6% ytd — With abundant system liquidity, total deposits continued to pick up (+1.8% mom), mainly due to a surge in demand deposits (+4.6% mom). The Loan-to-Deposit ratio dropped further to 50% while the HK$ L/D ratio also fell to 70.8%. Reminibi deposits grew for the second straight month (+1.7% mom) as the expectation of increased investment channels and usage of Rmb (e.g. Rmb denominated bonds, Rmb trade settlement scheme) may have sparked more interest.

■ DSB/DSF remain our top picks in the sector — With the recent upsurge in stock prices, valuations no longer appear cheap as most HK banks are currently trading at mid-cycle valuations. While we expect to see lower provisions, the revenue outlook remains muted in 2H09. DSB and DSF remain our top picks in the sector due to compelling valuations at 0.8x 10E P/B and potential normalization of credit cost. BOCHK is also relatively preferred given potential MBS write-backs and given that it will likely be a key beneficiary of positive developments and expansions in Rmb trade settlements.

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