History points to interest adjustments as traditional gift for domestic institutional share prices

Hong Kong bank share prices are likely to be supported in the months ahead by the 'gift' of lower interest rates handed out by the United States Federal Reserve, Salomon Smith Barney has forecast.

The positive outlook was presented yesterday to delegates at the second annual Salomon Smith Barney Asia Banking Conference in Hong Kong, which played host to more than 360 institutional investors from 13 countries.

The two-day conference continues today and will feature a keynote lunchtime address from deputy director of the People's Bank of China, Li Ruogu.

Historically, local banks have outperformed during periods of falling interest rates, Salomon Smith Barney noted in a review Bank valuation in Asia - Managing Value, which was distributed to conference delegates.

There were few reasons to suggest the market would behave any differently this time, it added, in the wake of the previous two 50 basis point cuts to its overnight Fed funds rate announced by the Fed in recent weeks.

'If anything, lower rates should prove particularly helpful to the Hong Kong banks at this stage of the economic cycle,' noted the report. 'Loan growth has remained stubbornly lacklustre despite a recovering economy, and a lower cost of borrowing could provide just the spark the sector needs.

'If collateral prices improve as a result of the lower discount rate, banks could be in a position to partially release provisions made in previous years, adding to the sector's 2001 profitability.'