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SCMP Reporter

Banking stocks are hot and are not expected to be cooled off any time soon, analysts say.

  HSBC Holdings, parent of Hongkong Bank and Hang Seng Bank, closed at a record-high level of $132.50 yesterday, following the release of above-expectation first-half results on Monday.

  The results boosted other banking stocks, with the Hang Seng financial sub-index closed at its record-high of 11,277.

  Bank of East Asia closed at its high for the year to date, while Hang Seng Bank ended near its high so far this year.

  Analysts envision only a minor correction in the near future, followed by a strong, if less dramatic, performance through the rest of the year.

  HSBC is thought likely to continue to defy gravity, supported by the upward revision of estimates by many analysts.

   Goldman Sachs analyst Roy Ramos said his firm had revised upward its estimate for 1996 earnings per share (EPS) to $14.40, up from $11.51, with a year-end share-price target of $150. That would give HSBC's stock another 13 per cent upside potential over the next six months.

  Goldman Sachs' share-price target for 1997 is $175, with an EPS of about $16, an estimate roughly mirrored by other brokerages.

  HG Asia yesterday raised HSBC's estimated 1996 EPS to $13.68, with a 12-month target of $155.

  Salomon Brothers boosted its 1996 EPS estimate to $13.90 and its 12-month target to $150-$160.

  The strength of HSBC is expected to power the banking sector higher, despite an expected deterioration of the business environment.

  Keith Irving, analyst at HG Asia said: 'We still remain positive on the banking sector, given the strength of HSBC.'   Despite the second-half banking environment being tougher, improvements in the retail, property and trade sectors will underpin performance, Mr Irving said.

  In particular, an expected tightening of the spread between the prime rate and the inter-bank rate to reflect a likely rise in US interest rates could hit bank earnings. The impact will be especially hard on smaller banks, some analysts said.

  At the same time, the very strong banking performance in the second half of 1995 could make second-half 1996 results look disappointing to many investors.

  However, Andrew Brown, regional banking analyst at Salomon Brothers, recommended investors focus on fundamentals, particularly the exceptional liquidity of most banks' balance sheets, which will continue to support loan growth.

  'Investors should recognise that earnings growth will continue at a healthy pace, and returns on assets and equity should continue to increase,' Mr Brown said.

  To support his assertion that small banks will not be unduly affected by a tougher market, Mr Brown said Salomon Brothers continued to place smaller banks - First Pacific, Da Sing and Wing Hang - at the top of its buy recommendation list, along side HSBC.

  If there is to be any downside potential in the near future it will likely be among the blue chips, analysts said.

   Despite posting strong interim results, Hang Seng Bank will not be able to match the performance of its big brother HSBC, they said.

  Analysts pointed to its higher price-earnings ratio of above 16, compared with a rough range of nine to 17 for Hong Kong banks in general.

 Henry Lui, analyst at Mansion House Securities, said: 'I like the bank, but compared to HSBC there is not much room for dramatic improvement.'   Bank of East Asia is also seen to be a little pricey, with a PE of near 17.

  Some analysts also raised concerns that the bank's increasing exposure to the Chinese market added an element of risk not seen in other major Hong Kong banks.

  Nevertheless, despite their relatively high price, most analysts continue to recommend the two banks, pointing to their strong fundamentals and relative fair value compared to other banking stock in Asia.



HSBC figures set bank plays on course for long bull run