Shares in Hong Kong's mid-cap banks are set to stage a strong rally this month as a result of the Hong Kong Monetary Authority's new measures to strengthen the currency board, according to a report by Core Pacific-Yamaichi.
The report upgrades Yamaichi's sector recommendation from underweight to neutral and claims the HKMA's measures will reduce money market volatility and lead to a more stable operating environment.
Yamaichi said the financial crisis in Russia and pressure on the Hong Kong dollar peg from yuan-devaluation rumours had caused share prices of most mid-cap banks to fall by 20-30 per cent in August.
According to the report, banks are suffering from negative interest-rate spreads but weak economic sentiment will deter them from raising their prime lending rates.
'Mid-cap banks will benefit most [from the currency-board measures] and after the price slide in August, mid-cap banks may stage a strong rebound in September,' it said.
The report said that local banks' operating performance would be disappointing this year, but wider interest-rate spreads would support higher net interest income next year.