Shares in Hong Kong and Singapore banks draw investor interest as prospects improve

Better fundamentals and solid earnings are behind the new enthusiasm, but analysts say that caution is needed as the scope for further rises is limited and banks still face headwinds

PUBLISHED : Sunday, 17 September, 2017, 7:59pm
UPDATED : Sunday, 17 September, 2017, 10:37pm

Investor interest in Hong Kong and Singapore bank shares has revived thanks to better fundamentals for the sector as well as improving fortunes at a number of individual banks, but analysts said caution was necessary as there may be limited room for further rises.

Hong Kong’s two largest banks, HSBC and Bank of China Hong Kong, have seen their stock prices rise by 21 per cent and 40 per cent respectively, and the next three biggest, Hang Seng, Standard Chartered and Bank of East Asia, have also seen double-digit rises.

In Singapore, DBS is up 15.8 per cent year to date, OCBC is up 23 per cent and United Overseas Bank has risen 15.2 per cent.

“We’ve seen a change in the last six to eight months. Investors are becoming more interested in Hong Kong and Singapore banks, and a significant part of this interest is coming from generalists, as well as interest from Chinese investors,” said Asheefa Sarangi, Hong Kong and Singapore financials analyst at CLSA, at the investment bank’s investor forum last week.

“The three pillars of shareholder returns – book value per share momentum, the chance for multiple re-rating and the certainty of a dividend yield – look like they will be in place in 2018, after a decade of absence,” Sarangi said.

Another share buy-back and a 5pc half-yearly rise in profit drive HSBC shares higher

Mainland Chinese investors are particularly interested in HSBC, which was among the top three stocks most traded by Shanghai investors through the Shanghai-Hong Kong Stock Connect scheme between April and July this year.

“Chinese banks get a tiny piece of their earnings overseas, thus it makes sense that Chinese investors want exposure to Hong Kong banks as they have a much larger scope,” said Brett McGonegal, chief executive at Capital Link International.

He added that the current global environment was one conducive to investing in bank shares.

“Banks are always a good play in an increasing rate environment as margins expand with the steepening yield curve,” he said. He added that there was an expectation that laws governing the US banking industry would be rolled back by President Donald trump, which would help boost profitability and investor interest in the sector.

However, Sarangi said that Hong Kong and Singaporean banks’ strong recent performance was already largely reflected in their share prices, and investors should not get ahead of themselves.

“The bad news is that the re-rating that we’ve seen has largely taken away the opportunity for some of these banks to run materially higher,” she said. She advised more caution in picking Hong Kong bank shares, where she likes HSBC but not Bank of East Asia, than in choosing Singapore ones, where her top pick is DBS.

There are still headwinds on the horizon for banks. They are waiting for the Basel Committee on Banking Supervision to issue new rules on the ways banks assess the riskiness of their assets, and so are holding onto capital rather than investing it or returning it to shareholders.

Hong Kong banks hoard capital as they await new Basel rules

Banks will also have to adjust to new accounting regulations, called IFRS 9, which will be effective from the start of next year.