HSBC hits fresh one-year high as bank shares gain ahead of expected Fed rate rise

HSBC shares hit a one year high in Hong Kong for the second day in a row, leading bank stocks higher as the market prepared for interest rates to rise next week.

HSBC jumped 3.31 per cent in the day, to close at HK$65.5.

The bank was the most traded stock on Wednesday with a turnover of HK$5.34 billion, representing 8.5 per cent of total main board turnover at HK$62.5 billion.

Standard Chartered also advanced 2.75 per cent, while Bank of China Hong Kong rose 1.9 per cent.

“Any rate increase would be a big positive [for Hong Kong banks]”, wrote Morgan Stanley analysts led by Anil Agarwal in a report. The analysts also changed their rating on HSBC’s stocks from underweight to overweight, and gave a target price of HK$64 for the shares.

The US Federal Reserve is expected to raise interest rates next Wednesday, and the Hong Kong Monetary Authority will follow suit due to the HK dollar’s peg to the US dollar.

Under the Morgan Stanley analysts’ bull case scenario, they raise the target price to HK$74 .

In this optimistic scenario, they say “[a] more benign Asia outcome with growth picking up, faster interest rate normalisation benefiting margins, and further Southbound buying of the HK line by mainland Chinese investors could see the shares move above our bull case.”

“The fact that some of the investment banks have changed their rating on the shares has driven some of the increase,” says Louis Tse, director at VC Brokerage.

Banks also led European markets in early trading. At one point, shares in Credit Suisse were up 6 per cent in Zurich, Deutsche Bank was up 4.9 per cent in Frankfurt, and Italy’s Banca Monte Paschi Siena was up 7.5 per cent in Milan after Reuters reported that the Italian government was preparing to take a controlling stake in the troubled lender.

Joseph Tong Tang, chairman of Morton Securities, believes HSBC’s share price can climb further to over HK$70 per share.

“The interest rate rise is definitely good news for HSBC as that would help improve its interest rate margin. In fact, HSBC’s share price has lagged behind other banking stocks and it is time for it to bounce back,” Tong said.

Banks benefit from a rise in interest rates as it means that their net interest rate margins - the difference between the rates they offer lenders and depositors as a proportion of their total assets - will widen.

Since the global financial crisis, low interest rates around the world have meant that banks’ net interest margins have been under pressure.

HSBC has seen its shares rise by 26.9 per cent since August 4 when it announced a share buy-back programme, which still has further to run.

“The fact that the bank will continue to buy back shares in the market in the following months would continue to support the share price of HSBC,” Tong added.

As of 6 December, the bank had bought back 288,662,614 of its own shares.

Analysts at Bernstein research led by Chirantan Barua say compared with HSBC, Standard Chartered “stands to gain the most from higher US rates on a relative basis”, noting that the bank’s income from deposits “jumped straight after the first US rate hike [last year].”

Because banks in Hong Kong have a large number of deposits, higher interest rates mean that they can gain better returns when they invest these.

Barua notes, however, that a hike in US rates will also have a collateral impact.

“There’s no free lunch,” he writes, “As US rates went up at the end of last year, loan volumes across the system tanked. In fact HSBC had negative loan growth in Hong Kong in H1 2016 for the first time since the global financial crisis.”

A decline in the housing market, which is expected along with a rise in interest rates, also brings risk into play for banks. This is why Barua is more bullish on Standard Chartered, as he notes the bank has sold its subprime business in Hong Kong and significantly curbed risk appetite.

“On risk, the bank’s not impacted in the same way as HSBC purely because of its much worse starting position,” he writes.