Reason
Even if the interest rate cut cycle starts, the interest rate center may remain at a relatively high level. On June 6, the ECB announced a 25bp cut in its three key interest rates and raised its 2024 GDP growth and inflation rate forecasts, emphasizing that it would not make a commitment to future interest rate paths. CICC strategy group believes that the ECB interest rate cut may present a "hawkish interest rate cut" and non-continuous interest rate cut features. The Fed and the Bank of England kept their policy rates unchanged at their June 13 and June 20 monetary policy meetings, respectively, in line with market expectations. According to OIS market expectations, the benchmark interest rates for the United States, the UK, and the eurozone are expected to fall by 43bp, 51bp, and 42bp, respectively, in 2024, corresponding to 1-2 25bp interest rate cuts. The current judgment of the ECB and the Fed on inflation prospects and interest rate cut paths is cautious. We believe that even if the interest rate cut cycle starts, the interest rate center may still be higher than the pre-epidemic level, and high interest rates may become the new normal.
"Hawkish interest rate cut" has a controllable impact on the profitability of hk based banks. According to Bloomberg's forecast, the average interest rate levels of the USD, GBP, and EUR in 2024 may be lower than the end of 2023 by 14bp, 19bp, and 44bp, respectively. Based on this assumption, we calculated that the negative impact of interest rate cuts on HSBC and Standard Chartered's net interest income in 2024 was USD 591 million and USD 108 million, respectively, equivalent to 1.3% and 1.1% of net interest income in 2023, and 1.8% and 1.9% of pre-tax profit in 2023. Bloomberg predicts that the average interest rate levels of the USD, GBP, and EUR in 2025 may further drop by 91bp, 112bp, and 106bp, respectively, and will have negative impacts on HSBC and Standard Chartered's net interest income of USD 3.205 billion and USD 701 million, respectively, equivalent to 7.3% and 7.3% of 2023 net interest income, and 9.7% and 12.3% of 2023 pre-tax profit. It should be emphasized that this calculation only considers interest rate factors, and we believe that the positive contributions of loan demand rebound, deposit structure improvement, non-interest income growth, etc. brought by interest rate cuts are likely to offset the negative impact of interest rate cuts to a large extent.
Replay of the interest rate cut trading range: Hk based bank stocks rose instead of falling, mainly due to the increase in risk appetite. We can find that the price of Hk based bank stocks and the 1-year USD OIS interest rate are only positively correlated during the expectation phase of the Fed's interest rate hike (Sept 2021-Feb 2022) in this cycle. During the four major interest rate cut trading stages since 2022, only the Silicon Valley Bank incident in March 2023 caused a significant underperformance of Hk based bank stocks, mainly because the market was worried about the spread of global financial system risks. The other three interest rate cut trading ranges have risen and outperformed the index. We believe that this mainly comes from the possibility of inflation falling or the labor market cooling providing the possibility of interest rate cuts, easing market concerns about the potential risks of maintaining high interest rates or further raising interest rates, and the price of risk assets rising. And the current market expectation is for a mild interest rate cut under the background of economic soft landing, and the impact on bank net interest income is controllable.
Risk: Economic recession in Europe and America exceeds expectations, and the interest rate cut exceeds expectations.
Chart: ECB cuts interest rates by 25bp in June
Chart: The market expects the Fed and the ECB to cut interest rates by 1-2 25bp within 2024
Chart: Hong Kong bank stock price VS 1-year USD OIS interest rate
Chart: 1Q24 HK real GDP YoY growth rate is 2.7%
Chart: HK retail sales value has been decreasing month by month since this year
Chart: After the withdrawal of spicy measures in the housing market, the volume of second-hand houses has rebounded, but the price is still falling
Chart: List of stamp duty policies in the HK housing market
Source of information: Bloomberg, Wind, CICC Research Department
Chart: Hong Kong's office prices fell 1% MoM in April.
Chart: The vacancy rate of grade A offices in Hong Kong was 17.7% in April, a MoM decrease of 0.3ppt.
Chart: As of the end of April, Hong Kong's banking sector loans have decreased by 2.0% compared to the beginning of the year.
Chart: As of the end of April, Hong Kong's banking sector deposits have increased by 3.0% compared to the beginning of the year.
Chart: Hong Kong's banking sector asset quality remains healthy, but non-performing loan indicators are still on the rise.
Chart: The sentiment of Hong Kong's capital markets rebounded somewhat in April.
Chart: The actual GDP growth rates of the UK and the euro zone have slightly rebounded within the negative range.
Chart: Inflation in Europe and America has fallen, creating favorable conditions for interest rate cuts. The stickiness of inflation in the United States is stronger than that in the UK and the euro zone.
Chart: The UK and the euro zone's manufacturing PMI have continued to improve since the 3rd quarter of 2023, while the U.S. manufacturing PMI has marginally weakened.
Chart: The UK's unemployment rate rose to 4.4% in March.
Chart: Actual income growth rate in the UK is still rising year-on-year in April.
Chart: Housing prices in the UK rose 1.5% year-on-year in May.
Chart: The mortgage overdue rate in the UK rose 5 basis points to 1.28% at the end of 1Q24.
Chart: The actual interest rate of existing mortgages in the UK was 3.58% in April, and the interest rate of new mortgages was 4.76%.
Chart: Personal loans in the UK increased by 1.0% year-on-year in April, while corporate loans decreased by 2.2% year-on-year.
Risk warning
US and European economic recession exceeds expectations. Since the current interest rate hike cycle, the overall US and European economies have shown good resilience. With inflation falling significantly from its high level, the expectation for an economic soft landing in the market continues to strengthen. However, at the same time, we have observed a trend of cooling labor markets and weakening bank asset quality indicators from recent macro data, and both the business and household sectors are gradually feeling the pressure of a sustained high interest rate environment.
Interest rate cut exceeds expectations. We recommend Hong Kong banks because their interest rate sensitivity is relatively high, so under the background of a rise in interest rate centers, we believe that the profitability and shareholder returns of Hong Kong banks are expected to be better than those in the period before the epidemic. If deep economic recession triggers a significant and rapid rate cut by foreign central banks, the performance of Hong Kong banks may face greater pressure.
Edited by Jeffrey