Morgan Stanley: Among Hong Kong banks, prefer internationally-oriented banks with reasonable valuations, giving HSBC and Standard Chartered an "Overweight" rating

Morgan Stanley published a research report indicating that in the first half of the year, local interest rate factors and credit quality risks persisted. Among the bank stocks, they prefer international banks over local banks, as local banks are overvalued while international banks have relatively reasonable valuations, supported capital returns, and positive prospects. They maintain an "overweight" rating on HSBC (00005.HK) and Standard Chartered (02888.HK).

Morgan Stanley believes that the dividend yield of Bank of China Hong Kong (02388.HK) will be supported. They expect that the upcoming interim results will show pressure on net interest margins, but non-interest income is expected to perform strongly. They will pay attention to management's views on credit quality and capital management, giving it a "reduce" rating, with a target price raised from 24.7 to 31.4 HKD. The bank also stated that Hang Seng Bank (00011.HK) is overvalued, maintaining a "reduce" rating, with a target price raised from 93 HKD to 94.5 HKD.

The bank believes that the performance of bank stocks in the second quarter will be mainly affected by the decline in HIBOR and the deterioration of credit quality in Hong Kong commercial real estate. They expect that wealth management and market income can offset some of the pressure, but they believe challenges will still exist in the second half of the year. They anticipate that net interest income and net interest margins for banks will record a quarter-on-quarter decline in the third quarter, with a slight recovery expected in the fourth quarter. With the expectation of declining U.S. interest rates, Morgan Stanley anticipates that net interest margins could further narrow by 2026