HG Asia is maintaining an overweight position on the Hong Kong banking sector, downplaying the growing perception among some analysts that banking stocks have overstretched themselves. 'We believe fears now emerging over the direction of margins, the achievable level of loan growth and asset quality can all be addressed and remain positive on the sector,' HG analysts Keith Irving and Peter Redhead said in their recently released Regional Banking Review. While profit growth may not match the strong performance of the first half, HG Asia sees the territory's banks registering growth in the 'high teens' through the end of the year. The banking sector would be fuelled by an improving domestic economy, which would ease mortgage discounts, boost trade financing and encourage credit-card use. With loan growth now outpacing deposit growth, a likely rise in US interest rates in the coming months should be easily absorbed, they said. Other positive signs were a rebound in the prime Hong Kong interbank offered rate to well above 3 per cent, which will improve banks' margins, and the number of loans approved but not yet withdrawn reaching $11 billion as of June. Many brokerages remain bullish on Hong Kong's large banks, while downgrading smaller institutions. HG Asia, however, sees strength and weakness in both sectors, and calls on investors to choose their stocks selectively. Dah Sing Financial was noted for its successful venture into the financial services business, which is expected to help the firm deliver net profit growth of 20 per cent a year over the next two years. International Bank of Asia was recommended, based on the bank's track record of margin preservation and cost control. That the stock remained at a 30 per cent discount to the market was another incentive. Bank of East Asia (BEA) was referred to as 'a bank with problems'. HG Asia said: 'BEA offers the lowest returns among Hong Kong's larger banks yet is the most expensive bank [stock] in Hong Kong.'