February 23, 2024
HONG KONG – While Hong Kong banks have reaped the benefits of rising interest margins in 2023, experts are warning of tough times ahead for the sector, as economic uncertainties are expected to lead to lower growth.
2023 was a bumper year for Hong Kong lenders amid rising funding costs. Pretax profit among the city’s banks jumped 62.1 percent year-on-year in aggregate last year, according to the Hong Kong Monetary Authority. That compared with an increase of 18.7 percent in 2022.
HSBC said the impairment charge for its almost one-fifth stake in the Bank of Communications came after a review of the mainland bank’s future cash flows, and outlook for loan growth and interest margins
As the largest of Hong Kong’s note-issuing banks, HSBC on Wednesday reported pretax profit rose 78 percent year-on-year to a record $30.3 billion last year.
The Asia-focused bank’s Hang Seng Bank subsidiary witnessed a rise of 58 percent in net profit to HK$17.85 billion ($2.28 billion) in 2023, driven by higher net interest income and operating income.
However, a tapestry of challenges confronting the nation’s economy has cast a long shadow over the banking sector. This is shown by HSBC’s pretax profits falling 80 percent year-on-year in the fourth quarter last year as it took a $3 billion charge on the value of its stake in China’s Bank of Communications and a further write-down on commercial real estate.
HSBC said the impairment charge for its almost one-fifth stake in the Bank of Communications came after a review of the mainland bank’s future cash flows, and outlook for loan growth and interest margins.
Redmond Wong, chief China strategist at Saxo Markets, said the market intersects with broader economic challenges, encompassing a distressed property sector, impending defaults, and fiscal constraints of local governments.
Last month, a Hong Kong court ordered winding up of the long-embattled property giant China Evergrande, marking the biggest collapse in the country’s real estate meltdown.
HSBC made $3.4 billion in provisions to cover expected credit losses for the year due to Chinese commercial real estate.
“The ailing property market, emblematic of broader economic struggles, requires an extended healing process,” Wong said. “Anticipated defaults and bankruptcies of Chinese developers, both in their listed holding entities in Hong Kong and business and project entities on the mainland, loom large.”
On a positive note, Hong Kong-based equity commentator Conita Hung Lai-ping said the city’s banks are prudent and capable of riding out renewed headwinds
Separately, the Bank of East Asia reported a profit of HK$4.12 billion last year, down 5.5 percent from the previous year.
In looking ahead to the performance of Hong Kong banks, Paul McSheaffrey, senior bank partner of KPMG Hong Kong, said in the accounting firm’s latest report that this year “will not be a year of growth” for the city’s banking sector.
Though a high-interest rate environment is expected to continue to help banks’ income, lower loan growth, a lackluster financial market and a credit loss trend fueled by mainland real estate woes will pose challenges to the sector.
“It is a time for banks to focus on operational efficiency and managing their risks, to be ready to reap the rewards when growth returns in 2025,” he wrote.
On a positive note, Hong Kong-based equity commentator Conita Hung Lai-ping said the city’s banks are prudent and capable of riding out renewed headwinds.
“Generally speaking, the business environment for banks is not as good as last year. But their exposures to the debt-ridden developers in the mainland are under control, and they have done a good job in risk management,” she said.