HK banks may see profits fall up to 67% in 2021: JPMorgan

Protesters vandalising a branch of Bank of China in Tsuen Wan, Hong Kong, this month. A stress test done by JPMorgan projected that the city's lenders could see earnings fall 24 per cent to 45 per cent next year and 39 per cent to 67 per cent in 2021
Protesters vandalising a branch of Bank of China in Tsuen Wan, Hong Kong, this month. A stress test done by JPMorgan projected that the city's lenders could see earnings fall 24 per cent to 45 per cent next year and 39 per cent to 67 per cent in 2021. PHOTO: REUTERS

SHANGHAI • Months of protests, a worsening economy and a plunge in property prices could translate into severe pain for Hong Kong's banks and threaten to end the city's status as a "safe haven" for customers' savings, according to JPMorgan Chase & Co.

A stress test performed by the United States bank projected that local lenders, including Hang Seng Bank and Bank of East Asia, could see earnings fall 24 per cent to 45 per cent next year and 39 per cent to 67 per cent in 2021.

That would lead to significant deterioration in return on equity and core capital buffers, analysts led by Mr Jemmy Huang told clients in a note on Monday.

They downgraded Hang Seng Bank to "underweight" from "neutral" and said they are taking a "cautious" view of lenders in the city.

"The social unrest in Hong Kong has persisted for more than four months and shows no signs of moderation," Mr Huang wrote.

While the Hong Kong government has laid out policy support including boosting loans to small businesses and cutting banks' capital buffers to mitigate an economic downturn, "history suggests a sustainable rally would not come through until the underlying issues are resolved", Mr Huang said.

Hong Kong banks probably will not outperform the benchmark Hang Seng Index in the next six to 12 months, he predicted.

  • 6% 

    Decline in shares of Hang Seng Bank this year.

  • 23% 

    Decline in shares of  Bank of East Asia this year.

Hong Kong may report negative growth this year as the economy reels from the social unrest, Financial Secretary Paul Chan wrote in a blog post on Sunday.

Hong Kong's freewheeling consumer-and finance-led economy is vulnerable to a potential collapse in confidence triggered by the turmoil.

Declines in residential prices and retail and office rents threaten higher credit costs on mortgages and property loans, while potential capital outflow and the monetary authority's intervention will hurt banks' net interest margin. Overseas loans, trade finance, and lending to wholesale and retail sectors also could be impacted, said JPMorgan.

Hang Seng Bank, controlled by HSBC Holdings, is likely to be hit the most among its peers due to its higher leverage and concentration of Hong Kong-dollar denominated portfolio, said JPMorgan analysts.

Shares of Hang Seng Bank have lost 6 per cent this year, while Bank of East Asia has tumbled 23 per cent.

BOC Hong Kong Holdings may fare better, given its sufficient capital position to sustain dividend yields even under stress tests, according to the JPMorgan note.

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A version of this article appeared in the print edition of The Straits Times on October 30, 2019, with the headline 'HK banks may see profits fall up to 67% in 2021: JPMorgan'. Print Edition | Subscribe