Hong Kong banks' earnings to only grow 5% in 2013

Blame it on abundant liquidity conditions exacerbated by weaker loan demand.

According to Barclays, Hong Kong banks' margins likely expanded slightly y/y in FY12 due to looser liquidity conditions in 2012 (vs liquidity squeeze in 2011).

System loans and deposits both rose ~9%-10% in 2012, although deposit growth was largely skewed towards 4Q12 after further quantitative easing in the US resulting in capital inflows into Hong Kong.

Here's more from Barclays:

Low credit costs could be a potential source for positive earnings surprise as asset quality conditions remain benign both in Hong Kong and in China despite slower economic growth. Overall, we forecast 2012 earnings to grow by 8% y/y on average.

Outlook for 2013: We forecast 5% sector underlying earnings growth going forward as increasingly abundant liquidity conditions coupled with slowing loan growth (6% in FY13E down from 10% in FY12) drive margins lower (-2bps).

Lower interest rates and loose monetary conditions in China will place pressure on margins and lower loan demand in Hong Kong from mainland-related companies. Offshore RMB is a key opportunity, especially for BOCHK, if there are any favourable regulatory developments.

Less conservative mortgage growth assumption: Despite the government's residential property cooling measures, property prices rose by 21% (Centa City Index) while system mortgages rose by 8% in 2012.

We raise our mortgage growth estimate up from -5% to 0% in FY13E reflecting our less pessimistic (though still conservative) near-term outlook on the property market. We maintain our -4% mortgage contraction in FY14E factoring in potentially more cooling measures by the government.

Earnings revision up to 5% higher: We raise our FY12-FY14 earnings estimates by 0-5% on average reflecting 1-2bp higher margins and slightly higher loan growth (6% in FY13E vs 5% previously, for our less conservative mortgage outlook).

Our FY13-14E forecasts are still 2-11% below Bloomberg consensus on average. For Hang Seng Bank, we incorporate a one-off accounting gain of HK$9.5bn in FY13E for de-recognition of Industrial Bank as an associate.

We raise our 12-month price targets for the Hong Kong banks by 2-29% based on our unchanged blended valuation methodology, higher earnings forecasts and incorporating a premium for potential corporate action for the small- to medium-sized Hong Kong banks.