Hong Kong banking giants tumble

By Staff and wire reports

HONG KONG, China -- Shares of Hong Kong banking giants HSBC and Hang Seng Bank have tumbled following several broker downgrades, triggered by poor earnings.

The two banks accounted for much of the broader Hong Kong stock market’s fall Tuesday, with HSBC shares down 7.73 percent to a near three-month low of $HK107.50, while Hang Seng Bank stock lost 6.65 percent to $HK94.75.

Several brokerages downgraded their recommendations on the two banks after they each failed to live up to analysts’ expectations for their full-year earnings.

HSBC reported a 22 percent increase in full year 2000 net profits of US$9.78 billion, which came in below analysts expectations, while Hang Seng booked a 20.5 percent increase in net profits to HK$10.14 billion, still slightly below consensus estimates.

Index lowest since early January

The banks’ falls helped the barometer Hang Seng Index fall 2.60 percent at 14,834.73, off an earlier low of 14,771.09, its lowest level since January 3.

ING Barings said it has downgraded its rating to "sell" from "hold," citing weaker-than-expected improvements in core operating profits and higher provisioning in the second half compared to the first half in Latin America, Asia and the United States.

ING Barings also said HSBC's net return on equity of 16.5 percent compares poorly with peers such as Barclays Plc at 25.1 percent and Citigroup Inc at 23.5 percent.

"It's not cheap as it is trading at around two times its net asset value, and that makes it a bit excessive compared to other global banks," said Flavia Cheong, fund manager at Aberdeen Asset Management in Singapore which manages about US$3.5 billion around Asia.

Analysts at Salomon Smith Barney said in a research report: "We view HSBC more attractive at a rating of less than 2.5 times its 2001 estimated price/book ratio, or below HK$100.”

Profits 7 percent below expectations

Morgan Stanley banking analyst Amit Rajpal said both banks’ profits were about 7 percent below his expectations.

“We already had a neutral rating on them, but we have downgraded our earnings outlook on Hang Seng by 11 percent for 2001 and by 15 percent for HSBC in 2001.”

“For Hang Seng the issue is in margins and most of the margin pressure we believe has already passed by so the underlying growth is probably okay,” he said.

“For HSBC the issues are on many fronts. They’re facing margin pressure, they have a larger reliance on market sensitive fronts such as margin lending and broking services, and they have credit issued in the Western market.

“If you add that to the market slowdown they’ll probably have a tough time showing improvement in 2001.”

However, Hang Seng Bank vice-chairman and chief executive Vince Cheng defended the result, arguing: “Actually, we were within the range of analysts forecasts.”

Cheng was wary of providing any upbeat predictions for 2001. “It is a massively competitive market in Hong Kong; I have a feeling that we are over-banked and a lot of the growth in Hong Kong is quite slow,” he told CNN.

"This is a challenging time for us"

Cheng added that he suspected many companies seeking to expand into China were borrowing yuan from Chinese banks rather than from Hong Kong banks. “This is a challenging time for us,” he said.

UBS Warburg said on Tuesday it had downgraded its recommendation on global banking group HSBC Holdings Plc following full-year 2000 results

“We’ve downgraded HSBC from a ‘buy’ to a ‘hold’ - much of the result can be attributed to the sluggish stock market, and it is disappointing,” UBS Warburg’s Hong Kong-based banking analyst told CNN.

UBS Warburg’s U.K.-based analyst Chris Ellerton added that “there is potential for further earnings downgrades in the next two-three months".

Reuters contributed to this report.

HSBC
Hang Seng Bank

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