(Bloomberg) -- Months of protests, a worsening economy and a plunge in property prices could translate into severe pain for Hong Kong’s banks, and threatens to end the city’s status as a “safe haven” for customers’ savings, according to JPMorgan Chase (NYSE:JPM) & Co.
A stress test performed by the U.S. bank projected that local lenders including Hang Seng Bank Co. and Bank of East Asia Ltd. could see earnings slump 24% to 45% next year and 39% to 67% in 2021. That would lead to significant deterioration in return on equity and core capital buffers, analysts led by Jemmy Huang told clients in a note 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,” 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,” Huang said. Hong Kong banks probably won’t outperform the benchmark Hang Seng Index in the next six to 12 months, he predicted.
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. Once Asia’s manufacturing powerhouse before the rise of mainland China, 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, 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, JPMorgan said.
Hang Seng Bank, controlled HSBC Holdings Plc (LON:HSBA), is likely to be hit the most among peers due to its higher leverage and concentration of Hong Kong-dollar denominated portfolio, the JPMorgan analysts said. Shares of Hang Seng Bank have lost 6% this year while Bank of East Asia tumbled 23%.
BOC Hong Kong Holdings Ltd. may fare better given its sufficient capital position to sustain dividend yields even under stress tests, according to the note.