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Hong Kong banks slump after Morgan Stanley downgrades outlook

[HONG KONG] Hong Kong banks declined after Morgan Stanley cut the sector's outlook, saying the stocks will underperform as a slowing economy and falling rates hurt profitability.

Bank of East Asia Ltd slumped 4.2 per cent as at 3.17pm, while Hang Seng Bank Ltd lost 3.3 per cent. The MSCI Hong Kong Index dropped 1.3 per cent after briefly dipping below the 14,000 point level for the first time since January.

Morgan Stanley reduced its recommendation on the industry to cautious from in-line. It cut Hang Seng Bank and HSBC Holdings plc to underweight.

"We would continue to avoid the segment," analysts including Anil Agarwal wrote in a note. "The economy is slowing fairly quickly in Hong Kong, with almost all key indicators meaningfully down year on year. This will pressure earnings in the second half and beyond."

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Falling local interest rates will further cloud the outlook, the brokerage said.

While banks are trading below long-term averages, they may continue to derate, similar to what's happened in other markets including China and South Korea, according to Morgan Stanley. Local lenders may also face competition in the future from virtual banks, it said.

Standard Chartered plc slid 2.2 per cent in Hong Kong, while HSBC Holdings plc dipped 0.5 per cent.

The MSCI Hong Kong has fallen 18 per cent since its April peak as protests increasingly paralyse the city. The tourism industry has been hammered, while the economy is heading toward a recession. Retail sales fell by a record 23 per cent in August from a year earlier.