Risk-off Rotation Drives Hong Kong Banks to Lead Gains; STAN Offers Both Valuation and Return Advantages

Overview

The report reviews changes in Hong Kong banks' share prices, credit, interest rates, liquidity, mortgages, and asset quality in July 2026. Risk-off capital rotated from South Korea and Taiwan to Hong Kong and China markets, and from the technology sector to the financial sector, driving Hong Kong bank stocks to significantly outperform the broader market. Fundamentals show a combination of improving loan growth and a slight narrowing of deposit spreads; HSBC and STAN's first-half 2026 results showed solid revenue momentum and no negative surprises in asset quality, which may prompt the market to raise earnings expectations.

Core views

First, industry loan growth rose from 6.0% year over year in May to 6.2% in June, with loans for use in and outside Hong Kong growing by about 6% and 7%, respectively, and mortgage loan growth also rising to 3.7%. Second, rising funding costs and intensifying deposit competition led to higher implied deposit rates and a month-over-month narrowing of deposit spreads, though an improvement in the loan-to-deposit ratio can provide some buffer. Third, residential mortgage delinquency ratios, negative-equity mortgages, and employment data indicate that retail asset quality remains stable, while the longer disposal cycle for commercial real estate collateral may keep credit costs elevated. Fourth, policy support for fixed income, foreign exchange, and offshore RMB markets helps consolidate Hong Kong's position as an international financial center. Fifth, STAN ranks first in the large-bank preference order due to its more attractive valuation, clearer ROE improvement path, and larger potential upside.

Analysis framework

The report adopts an approach combining monthly high-frequency industry tracking with cross-stock comparison: it compares bank stocks' relative returns versus major indices, tracks loans, mortgages, loan-to-deposit ratios, CASA ratio, SOFR-HIBOR spreads, composite interest rates, delinquency ratios, and bankruptcy data, and combines HSBC and STAN results, ROE or ROTE forecasts, valuations, and target prices to form a stock selection ranking.

Methodology notes

• Industry Cycle TrackingBank Operating High-frequency Indicator Framework

  Assess bank operating trends through credit growth, deposit structure, funding costs, and asset quality.

  Loan and mortgage growth measure asset expansion, the loan-to-deposit ratio and CASA ratio reflect liability efficiency, the composite interest rate and implied deposit spread measure funding costs, and delinquency, negative-equity mortgage, and bankruptcy data are used to assess credit risk.

• Market Performance AnalysisRelative Return and Sector Rotation Analysis

  Compare the performance of Hong Kong bank stocks with market and financial sector indices, and identify the drivers of capital rotation.

  The report links banks' excess returns in July to changes in regional risk appetite and sector rotation from technology to financials, while distinguishing between the performance of local Hong Kong banks and large international banks.

• Stock SelectionValuation and ROE Trajectory Comparison

  Determine stock ranking by combining earnings expectations, capital return improvement, valuation, and target-price upside.

  STAN's ROE improvement, relative valuation, and target-price upside are more attractive, making it the top pick among large banks; BOCHK and HSBC remain rated Overweight.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Standard Chartered Plc (HK) (2888.HK)

  Top pick among large banks, rated OW

  Strengths

  First-half 2026 pre-provision profit momentum was better than expected, with no obvious negative surprises in asset quality, a stronger ROE improvement trajectory, a relatively attractive valuation, and target-price upside of about 32.3%.

  Weaknesses

  Still affected by global interest rates, the credit cycle, and the complexity of cross-market operations.

  Comparison

  Compared with BOCHK and HSBC, the report believes it has the best combination of valuation and ROE improvement, ranking first in the final preference order.

  Risks

  Commercial real estate credit costs, global economic slowdown, regulatory changes, and capital returns falling short of expectations.

• Bank of China (BOCHK) (2388.HK)

  Second choice among large banks, rated OW

  Strengths

  In the first seven months of 2026, its mortgage market share in completed properties reached 31.2%, ranking first in the industry, and it benefits from the recovery in Hong Kong loans and policy support for offshore RMB business.

  Weaknesses

  The report still expects its first-half 2026 pre-provision profit to decline, while target-price upside versus the report-date price is about 5.8%, lower than STAN and HSBC.

  Comparison

  It leads in the local mortgage market and ranks after STAN but before HSBC in the final order.

  Risks

  Deposit and mortgage competition, narrowing net interest margin, local property and commercial real estate risks, and policy sensitivity.

• HSBC Holdings plc (0005.HK)

  Maintain Overweight, but ranks relatively lower among large banks

  Strengths

  First-half 2026 revenue and pre-provision profit momentum were solid, asset quality was stable, and it continues to optimize its portfolio by selling non-core businesses and high-risk assets.

  Weaknesses

  Compared with STAN, its valuation appeal and ROE improvement flexibility are weaker; mortgage market competition has intensified, and the disposal of HSB risky mortgage assets still needs to progress.

  Comparison

  Its market share in uncompleted-property mortgages is about 23.9% and ranks first, but the report's final large-bank ranking is STAN, BOCHK, HSBC.

  Risks

  Execution of asset disposals, global interest-rate changes, private credit and mortgage risks, and regulatory and cross-border operating risks.

Key data

• Relative performance in JulyOutperformed by about 10 to 11 percentage pointsPerformance of Hong Kong bank stocks relative to the Hang Seng Index and Hang Seng Financials Index.
• Industry loan growthUp 6.2% year over year in June 2026Higher than 6.0% in May; loans for use in and outside Hong Kong grew by about 6% and 7% year over year, respectively.
• Mortgage loan growthUp 3.7% year over year in June 2026Higher than 3.3% in May, reflecting a moderate upward trend amid the recovery in the property market.
• Mortgage market shareBOCHK 31.2% in completed properties; HSBC 23.9% in uncompleted propertiesIn the first seven months of 2026, BOCHK ranked first in mortgages for completed properties, while HSBC ranked first in mortgages for uncompleted properties.
• Loan-to-deposit ratio52.9%Up 66 basis points month over month in June 2026.
• CASA ratio43.4%Lower than 44.6% in May 2026.
• 1-month and 3-month SOFR-HIBOR spreads96 basis points and 83 basis pointsWidened by 14 basis points and 4 basis points month over month, respectively, in July 2026.
• Composite interest rate1.37%Rose for the third consecutive month in June 2026, compared with 1.26% in May, indicating higher bank funding costs.
• Mortgage delinquency ratio3-month 0.11%; 6-month 0.08%The 6-month delinquency ratio fell by 1 basis point month over month.
• Number of negative-equity mortgagesDown 62% month over month and 88% year over yearImproved due to the recovery in property prices and valuations in the second quarter of 2026.
• Unemployment rate3.7%Flat month over month in June 2026, with the labor market broadly stable.
• Target-price upside for large banksBOCHK approximately 5.8%; HSBC approximately 24.9%; STAN approximately 32.3%Calculated based on the target prices listed in the report and closing prices on August 6, 2026.

Impact & implications

For the industry, a rebound in loan growth, stabilization in the property market, and offshore RMB policy support are favorable for revenue and asset-quality expectations, but rising funding costs mean earnings improvement may not translate into net interest margin expansion in tandem. For investors, short-term excess returns include risk-off and sector-rotation factors, and their sustainability will depend on whether loan growth can offset narrowing deposit spreads and whether commercial real estate credit costs ease as expected in the second half of 2026. At the stock level, STAN's valuation, ROE trajectory, and target-price upside are more attractive; BOCHK benefits from its leading position in local mortgages, but first-half pre-provision profit may come under pressure; HSBC has solid revenue momentum and continues to optimize its asset portfolio, but ranks lower on a relative basis.

Risks

• The longer disposal cycle for commercial real estate collateral may keep banks' credit costs elevated in the second half of 2026.
• Intensifying deposit competition and rising composite funding costs may further compress deposit spreads and net interest margins.
• Smaller banks increasing cash rebates indicates that price competition in the mortgage market continues to intensify.
• Concerns over ODI rules related to capital gains on offshore insurance policies may weigh on sector sentiment.
• If the property market recovery stalls, the improvement trend in mortgage growth, negative-equity mortgages, and credit quality may reverse.
• Excess returns previously driven by risk-off sentiment and sector rotation may give back gains as risk appetite changes.
• Fed policy expectations, SOFR-HIBOR spreads, and changes in Hong Kong dollar liquidity may increase earnings volatility.
• J.P. Morgan has market-making, client, investment banking, or brokerage relationships with some covered companies; investors should make prudent judgments in conjunction with relevant conflict-of-interest disclosures.

What to watch

• Hong Kong banks' 2026 interim results and adjustments to pre-provision profit, net interest margins, and earnings forecasts.
• Whether industry loan and mortgage loan growth can continue to rise year over year.
• Monthly changes in loan-to-deposit ratios, CASA ratios, and special deposit rates.
• SOFR-HIBOR spreads, the aggregate balance of the Hong Kong banking system, and the HKD/USD exchange rate.
• Commercial real estate non-performing loans, collateral disposal progress, and credit costs.
• Mortgage cash rebates and changes in major banks' market shares.
• New measures in offshore RMB fixed income and foreign exchange markets, and the business contribution from RMB sovereign bond futures.
• Subsequent developments in ODI and offshore insurance policy capital gains rules.
• HSBC's disposal of non-core assets and progress on the STAN-backed Hong Kong dollar stablecoin HKDAP.