HONG KONG: Bank of China (BOC) International expects the Hang Seng Index (HSI) to plummet to as low as 11,000 points later this year, mainly due to the gloomy banking and financial stocks.

BOC International Managing Director and Head of Research Anthony Lok told reporters yesterday that the outlook for mainland lenders remains bleak this year in light of the narrowing interest spread and climbing non-performing loans (NPLs) ratio.

The shortfalls are expected to lead a 20 to 30 percent decrease in profits for the lenders throughout the year.

Also, he noted that shares of the mainland lenders will face massive short-sell pressure in April and October, since many foreign strategic partners of mainland banks, such as Bank of America, are in a hurry to offload their stakes in mainland counterparts when the lock-up period expires.

"Although Bank of America sold $2.8-billion worth of China Construction Bank (CCB) shares on Jan 6, it still holds a considerable amount of CCB after the disposal," Lok said. "The US lender might further downsize its holdings if its financial stability further deteriorates."

Despite the possible downside correction, Lok noted that the liquidity and sovereign statuses of mainland banks remain healthy compared with their US counterparts.

Given banking and financial shares constitute about 50 percent of the H-share market, Lok predicted that the poorly performed banking shares will precipitate the HSI into the bottom, hitting 11,000 late this year.

But in the short run, Lok pointed out, the market might see a temporary rebound to 18,000. "The market," he said, "will bounce back notably as a result of the implementation of the highly expected new bailout package of new US President Obama."

In addition, he believes that the Hang Seng China Enterprises Index will linger between 5,000 and 10,000 this year, while the Shanghai Stock Exchange Composite Index will hover within the 1,600-to-2,500 range.

Commenting on local banking giant HSBC, Lok said the bank is still suffering from huge downside pressure on fundraising speculation.

"The pressure will intensify on HSBC as peers such as Standard Charter Bank have leveraged the market," he said.

Lok didn't rule out the possibility that HSBC might consider slashing its dividend payout in order to maintain its capital adequacy ratio.

And he held a positive view toward the mainland telecom sector.

(HK Edition 01/23/2009 page16)