Key monthly trends:    HKMA announced monetary stats for Sep'17, with MoM loan growthrecovering from a flattish number in Aug. However, deposit growth failed tomatch the loan momentum, with LDR reaching 72% (Dec'16: 68%), the highestlevel since Jun'15.    System loans grew 1.1% MoM (+12.8% YTD) – domestic loans were up0.9% MoM (+12.4% YTD), offshore loans increased 1.2% MoM (+13.9%YTD) and trade finance was up 2.2% MoM (+11.6% YTD). Currency wise,HKD loans grew 1.8% MoM (+14.1% YTD) and FX lending was flat (+0.2%MoM, +11.1% YTD).    Sector-wise, QoQ domestic loan growth was driven by corporate property(+3.4% QoQ), FIs (+5.9%) and loans to individuals (total: +2.9%,mortgages: +2.2%, unsecured: +5.4%), together contributing to 93% ofloan growth.    System deposits were flat (+0.2% MoM, +6.6% YTD), as FX deposits fell0.9% MoM (+1.6% YTD), offset by growth in HKD deposits at 1.1% MoM(+11.7% YTD). The CASA ratio was stable at 57.9% (Aug: 57.7%). Overallsystem LDR edged up to 72.4% (Aug: 71.7%), with HKD LDR at 78.8%(Aug’17: 78.3%, Dec’16: 77.1%) and FX LDR at 65.5% (Aug: 64.8%).    RMB deposits increased slightly by 0.5% MoM (-2.1% YTD). RMB timedeposits fell by 1.6% MoM (-7.1% YTD), offset by RMB savings deposits,growing 6.2% MoM (+13.2% YTD) with the proportion in time depositsdropping to 71.4% (peak: 85% in Sept’14). Offshore RMB deposits nowaccount for 5% (same in Aug) of the system (peak: 12.8% in Mar’14).    The residential mortgage survey showed outstanding mortgage loansrising by 0.7% MoM (+6.1% YTD); mortgage approvals dropped 1.7%MoM and loan drawdowns fell 1% MoM. New loans priced with referenceto HIBOR fell to 93.4% (Aug: 95.4%).    The composite interest rate remained flat MoM at 0.30% by the end of Sep(Aug: 0.30%). Our deposit cost check with sample HK banks in Oct’17showed that deposit rates largely remain the same MoM with the USDrates having +~50bp differentials. Please refer to Figure 7for details.    Tighter liquidity and rates – Are deposit costs due to pick-up?    Since HKMA’s mid-Sept decision to issue additional exchange fund bills,totaling HKD40n, as well as quarter-end dressing and IPO activities recently,the 1M/3M HIBOR rose by 37bp/21bp until 31Oct. The discount to LIBOR hasnarrowed to 45bp/42bp (mid-Sept: 82bp/57bp) – Figure 1. Liquidity has beentightening, with HKD LDR being the tightest it has been since Jul’15and FXLDR reaching 65.5% (highest since Apr’00). While this appears to besupportive to margins, we are concerned that the new loans asset yields couldbe lower due to rising loan competition while deposit cost could pick up fromslower deposit growth. The recent BoCHK 3Q17operating trends also showedNIM pressure . As we highlighted in our 2H17outlook note, we believethat although the higher rates are margin-accretive, the earnings benefits willnot likely be linear from higher rates. We stay cautious on HK banks, with DahSings as our only Buy rated stocks on a discounted valuation vs. peers.

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