- Further USD depreciation pressure to translate to lower HIBOR and wider HKD-USD spread
- Hong Kong banks faced with NII pressure amid lower HIBOR; non-NII to be supported with more capital market activities
- Hong Kong property would be a potential beneficiary of low rates, but we expect continuous pressure on banks’ property asset quality in the near term; international banks are preferred
- Insurance sector could benefit indirectly with better equity market outlook and higher demand
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Sharp decline in HIBOR. HIBOR has declined sharply alongside USD weakness as recent US tariffs failed to lift the dollar — unlike during Trump’s first term — amid his continued preference for a weaker currency under the “Mar-a-Lago Accord” strategy. As the HKMA buys USD and injects HKD liquidity to maintain the HKD-USD peg, interbank rates have dropped, widening the HKD-USD spread. Notably, 1M HIBOR plunged from 4% in early May to below 1% within a month, as the Hong Kong aggregate balance rose from HKD44bn to HKD174bn. We maintain that the USD remains overvalued, with the US Dollar Index (DXY) expected to fall to 92.5 by end-2026, and forecast 3M HIBOR to settle at 2.3% by end-2025.
Hong Kong banks to see net interest margin (NII) weakness; non-NII to be supported. We expect lower HIBOR to have a negative impact on NII. According to Hong Kong banks’ disclosure, a 100 bps parallel downward shift of the HKD yield curve will lead to <1% NII impact for international banks such as HSBC, and a 3-7% NII impact for local Hong Kong banks such as Hang Seng Bank and BOCHK, based on FY24’s balance sheet. We believe the impact would be less material, as aside from HKD loans, other non-loan assets should be more flexible to higher yield investments or currency swaps to higher rate currencies.
On the other hand, Hong Kong banks will benefit from growing non-NII in a low HIBOR environment to partly offset NII weakness. Interbank liquidity is thus likely to remain flush, becoming a driver for more activities in the Hong Kong capital market. Hong Kong banks will then benefit from growing fee income, especially in the stock brokerage and wealth management segments. Overall, we estimate 100 bps of HIBOR drop to bring c.5% negative net profit impact on Hong Kong local banks. Impact is likely to increase in 2H25; although we do not expect material impact in 1H25. Impact on dividend payout should be minimal, as Hong Kong banks have strong capital position to further raise dividend payout ratio even if earnings drop y/y.
Asset quality on Hong Kong commercial real estate (CRE) needs time to improve. A key concern on Hong Kong banks’ asset quality has been their exposure to Hong Kong property. Lower HIBOR could potentially translate into lower mortgage rate for homebuyers, boding well for both end-user and investor demand. It also alleviates concerns over commercial property. However, we may not see immediate improvement in Hong Kong banks’ asset quality on Hong Kong CRE, as it will take time to stabilise. Thus, we expect non-performing loan (NPL) ratio and credit cost for some Hong Kong banks will remain high in interim results. Nevertheless, Hong Kong banks overall offer >5% FY25F dividend yields and remain attractive dividend plays. We maintain preference for international banks.
Insurance sector to indirectly benefit from low HIBOR. Unlike banks, we see that insurance may indirectly benefit from the low HIBOR environment, with 1) a better outlook in the equity market to lift their investment yield; and 2) a better demand for participating products as banks deposit rate drops.
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