Lowering Fair Value Estimates for Hong Kong-Listed Banks on U.S Interest-Rate Cut

With the U.S. Federal Reserve making a 50-basis-point cut to its target interest rate to 1%-1.25% ahead of its monthly meeting, we expect lower interbank rates in Hong Kong and Singapore to flow through to weaker net interest margin and profitability for the banks under our coverage. Under our base-case scenario previously, our U.S. team did not expect moderation in global growth to cause the U.S. Federal Reserve to lower the target rate again in 2020. Our base case for the Hong Kong and Singapore banks did assume declining net interest margin in 2020 and 2021 from earlier interest-rate cuts. With CME interest-rate futures implying a further interest-rate cut in the March 18 meeting, we factor in another 50-basis-point cut. From a sensitivity perspective, we estimate the impact of a 25-basis-point cut on net interest margin is 2-5 basis points for the Singapore banks and 3-5 basis points for the Hong Kong banks. Uncertainty remains high given the diverse outcome of the coronavirus situation and the following monetary responses by central banks. While we remain positive on the banks' long-term growth prospects, positive catalysts are lacking in the near term, although dividend yields of 4%-6% are attractive.