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Which is the Best Hong Kong Bank for Investors?

Banks are a great sector to own in order to enjoy the economic growth of a country, as they represent the heartbeat of any economy. By investing in banks, you’re staking your belief in the future prosperity of that country. That’s because banks thrive on healthy economic growth and the continued development of the economy via corporate lending and mortgages, for example.

This is no exception with Hong Kong banks. And the three largest Hong Kong-headquartered banks are Hang Seng Bank Limited (SEHK:11), BOC Hong Kong (Holdings) Ltd (SEHK:2388) and Bank of East Asia Limited (SEHK:23). The market capitalisation of these banks is HK$333 billion, HK$299 billion and HK$62 billion, respectively.

Let’s look at three aspects of these banks to determine which of them is the most attractive for investors to own.

Loan growth

Loan growth is an important metric for banks as it demonstrates its ability to grow its net interest income over time. If loan growth stagnates or is negative, this may indicate poor economic conditions that are affecting the entire industry.

When comparing loan growth rates in a specific region or country, the bank with the highest growth rate signals that it has been able to market itself the best or offer more attractive terms compared to peers.

Hang Seng Bank reported the best year-on-year loan growth of 9% among the three banks, but this is not the only metric that matters, as the bank’s net interest margin (NIM) is also important, as some banks may sacrifice margins just to aggressively grow their loan book.

Winner: Hang Seng Bank

Net interest margin (NIM)

The net interest margin, or NIM, measures the difference between the bank’s deposit rate (the interest rate it pays to depositors) and the bank’s lending rate (the interest rate it charges borrowers). A higher NIM is obviously a good thing as this shows that the bank is able to earn a wider spread on its deposits, which will benefit net interest income (NII).

Hang Seng Bank has the highest NIM among the three banks at 2.18%. This is impressive when we consider the fact that loan growth was also the highest at 9% and shows that the bank was not aggressively doling out loans at lower rates in order to lure customers. 

Winner: Hang Seng Bank

Return on equity

The final aspect to look at is the return on equity (ROE) of a bank. This is arguably the most important aspect of all as it measures the profitability per dollar of share capital. Effectively, it measures the returns which investors are getting from investing in the bank.

Hang Seng once again shines with an ROE of 16% and this is high even when compared to other banks in Asia, such as Singapore banks which have an average ROE of between 10% to 12%).

Winner: Hang Seng Bank

A clear winner

Hang Seng Bank is the clear winner here in all three aspects. It has demonstrated robust loan growth, has the highest NIM and also the highest ROE among the three banks. Investors should go one step further by looking at the three to the five-year history of ROE, NIM and loan growth for each of the banks in order to ensure this is not just a one-time anomaly.

Another aspect to consider is also whether each bank is trading expensively on a price-to-book basis, as this provides an indication of whether investors have priced in the solid numbers.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Royston Yang does not own shares in any of the companies mentioned.