Investors’ appetite towards Hong Kong and Singapore banking stocks have improved, thanks to better fundamentals and attractive valuations.
Banks in these countries have been traditionally following the US interest rate closely. The Federal Reserve’s normalisation of interest rate has gradually created better opportunities for banks in both locations to generate attractive revenue.
‘The expansion of the net interest rate margin is the major reason for banks in Singapore and Hong Kong to increase its revenue,’ Arthur Kwong, head of Asia-Pacific equities at BNP Paribas Asset Management told Citywire Asia.
‘When the US started raising interest rates, central banks in Hong Kong and Singapore would start tightening the markets as well. The local banks’ loan rate will follow the US, meaning local banks will generate higher amount of interest due to an increased loan rate,’ he said.
‘On the deposit side, when interest rates go up, normally the deposit rate would not be re-pricing the same amount as of the loan lending rate at the banks. So that’s why when you see interest rates go up, normally banks would be able to benefit from the loan repricing and they should earn the net interest rate margin expansion.’
The Fed’s first interest rate hike came in December 2015, while the US central bank slashed rates to zero in 2008 in the midst of the global financial crisis. Furthermore, Hong Kong and Singapore’s private wealth expansion has also contributed to the banking sector’s growth.
‘If you look at China, there are a lot of wealthy individuals that need wealth management services. Hong Kong and Singapore are very good at these businesses. So [those banks] should also benefit,’ Kwong said.