Hong Kong banks’ full year earnings results may be affected by difficulties in overseas operations

Like many sports teams, it is expected to have been a case of strong at home but weaker away for Hong Kong’s banks in 2016.

The Hong Kong Monetary Authority announced in January that the banking sector as a whole posted a pre tax profit gain of 8.7 per cent for 2016, but individual banks are expected to see lower profit growth due to difficulties elsewhere in the world.

Hong Kong’s largest lender, HSBC, which will publish its full year results on Tuesday, is expected to post a rise in full year pre tax profit of 4.7 per cent compared to 2015, according to a poll of eight analysts by Bloomberg. This would mean the bank would see pre tax profits of US$19.9 billion for the year.

Away from Hong Kong, HSBC has embarked on a substantial programme of branch closures in the UK in an attempt to cut costs. The London-headquarterd bank has been hit by a number fines by regulators, especially in the US, but also in Europe. For the fourth quarter, CLSA banking analyst Asheefa Sarangi said in a report she anticipated significant one-off items of US$1.4 billion for the UK banking levy and US$500 million for litigation and other such costs, but that the bank would still post a profit before tax.

The UK banking levy is a yearly charge that has been imposed on banks in the UK in the fourth quarter since the financial crisis.

Standard Chartered is predicted to post full year profits of US$1.33 billion when it releases its 2016 results on February 24, according to a Bloomberg poll. The 58 per cent year on year increase follows a catastrophic 2015, in which the bank’s pre tax profit dropped to US$834 million.

As for the fourth quarter, Sarangi wrote: “We expect StanChart to be loss making due to one-offs.... the major lumpy items that we anticipate are a credit valuation adjustment charge of US$100 million, the UK bank levy of US$400 million and US$900 million in restructuring charges.”

Bank of East Asia, the larger of Hong Kong’s two remaining family run lenders, is expected to announce a more troubled operating environment for 2016 on Friday.

Eight analysts surveyed by Bloomberg expect the bank to post pre tax profits for the year of

HK$5.171 billion, a fall of 23.4 per cent, as BEA continues to be affected by difficulties in mainland China, its largest market by loans.

The bank is also involved in an ongoing court case with activist hedge fund Elliott Investors, who want the bank to be put up for sale.

Moving past 2016, analysts are rather more optimistic on the fortunes of Hong Kong’s banks.

“We continue to be very bullish on Hong Kong banks given the moves in interest rates in the US dollar and Hong Kong dollar. We expect net interest margins to be on a multi-year upswing, which will help large Hong Kong banks do well,” Anil Agarwal, an equity analyst at Morgan Stanley wrote in a report.

A rising interest rate environment should allow banks to boost returns on their investments, and the low loan to deposit ratio of 68.4 per cent for authorised institutions in Hong Kong, according to the HKMA, means that they have money to invest.

This is already starting to be reflected in the share price. In the past six months, HSBC shares in Hong Kong have risen 26 per cent, Standard Chartered’s by 20.6 per cent and Bank of China HK by 22.6 per cent.

Bank of China HK will publish its full year results at the same time as its parent, Bank of China, an announcement that traditionally takes place towards the end of March.

BEA’s shares have been volatile in the last six months, but at present are little changed from six months ago.