Hong Kong Banks:At a glance... (HKMA November statistics, chartbook)

December stock price performance negative. After moderate gains in November (+0.8%), the group reversed course in December with an average negative return of 3.0%. Wing Hang Bank (WHB) was the only stock in the black (+1.9%) as M&A speculation continues to support its share price. The laggard of the group was Standard Chartered (-5.4%) due to a weaker-than-expected full-year pre-close statement reflecting weaker wholesale income. The group’s price performance was largely in line with the broader market (-2.4%) as fears of a Chinese slowdown dampened market sentiment as we closed out 2013.

Tapering a near-term headwind. As the Federal Reserve announced on 18 December 2013 that it will begin to reduce monthly asset purchases in January (from US$85b to US$75b), potential fund outflows driven by higher US interest rates could potentially tighten system liquidity leading to higher funding costs as deposit competition increases. While banks should be able to increase pricing (due to higher rates) to maintain margins, there will be a time lag as loan re-pricing takes a while longer to reflect tighter market liquidity. As the pace of tapering is still uncertain, we feel it is still too early to sound the alarm in terms of lower asset prices and a corresponding increase in credit costs.

HKMA November statistics. Loan growth posted a moderate rebound (+0.9% MoM, +17.7% YoY) after a weak October while system deposits had another strong month (+1.0% MoM, +11.2% YoY). Total system loan-to-deposit ratio decreased 10bp to 71.3% while HKD LDR fell 50bp to 81.4%. RMB deposits continue to record strong growth (+5.8% MoM) to 827b, and now make up 11.6% of total system deposits. The mortgage market remains tepid as mortgage loans approved were down slightly (-2.1% MoM) at HK$14.6b. After three months of increases, the value of primary market transactions posted a moderate decline (-2.3% MoM) to HK$3.5b. Share of HIBOR-based mortgages increased 420bp to 30.5% and total outstanding system mortgages remained broadly flat (+0.2% MoM) at HK$903.6b.

Stock picks. We continue to prefer the smaller family-owned banks (WHB/DSBG) over the larger players as margins for the group are likely to come under pressure in 1H14F as a reduction in system liquidity brought on by tapering increases funding costs. While the margins of smaller players would theoretically be harder hit given their deposit mix, we believe continued development of the M&A theme will provide a meaningful offset. We remain slightly cautious on the group as the timing and full impact of tapering remains uncertain.