Citi's research report highlights Hong Kong's banking sector capital adequacy ratios reaching historic peaks, enhancing shareholder return visibility. The firm upgraded HANG SENG BANK (00011) from "Neutral" to "Buy" while maintaining a "Buy" rating on BOC Hong Kong (02388), with Bank of East Asia (00023) retaining its "Neutral" status.
Hong Kong bank stocks have surged 37% year-to-date, outperforming the Hang Seng Index. BOC Hong Kong led this rally, fueled by robust southbound capital inflows chasing high-dividend opportunities. Although recent HIBOR declines may pressure net interest margins (NIM), Citi anticipates profitability improvements as HIBOR normalizes by Q4 2025.
Medium-term challenges from potential Fed rate cuts appear manageable, given prime-rate caps on most Hong Kong mortgages and expectations of a 3% terminal federal funds rate. Commercial property risks persist but remain priced into consensus estimates reflecting higher credit costs.
The one-month HIBOR plunged 186 basis points in Q2 after the HKMA intervened during USD/HKD's strong-side convertibility breach. Current 1% HIBOR levels threaten Q2-Q3 NIM, though weakening toward the weak-side convertibility band should narrow Hong Kong-U.S. rate gaps through HKMA operations. Citi's strategists project HIBOR rebounding to 2%-3%, driving NIM recovery by late 2025.
HANG SENG BANK's upgrade stems from three drivers: 1) Market consensus already prices in 50bps average credit costs for 2025-2027 2) A robust 21% CET1 ratio enables clear capital return visibility, including ~6% dividend yields through 2027 and HK$3 billion buybacks in 2026-2027 3) Revenue forecasts exceed consensus by 4% for 2026-2027, driven by resilient net interest income. Consequently, its target price jumps from HK$105 to HK$135.
BOC Hong Kong's "Buy" rating stays with targets lifted from HK$33.9 to HK$40.8, reflecting solid revenue prospects, stable asset quality, and potential valuation support from yield-seeking southbound capital. Bank of East Asia's target rises modestly from HK$11 to HK$11.6.
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