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Hong Kong’s banks thrive with booming earnings from interest rates.

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TLDR:

Hong Kong’s banks reported significant profits in 2023 due to record interest rates and increased demand for banking services. Pre-tax profit for retail banks increased by 62.1% in 2023, compared to 18.7% in 2022. However, the number of negative equity cases doubled during the same period. The banks’ net interest margins also increased to 1.68%, the highest in four years. Despite this success, the proportion of bad or doubtful loans rose as businesses faced higher funding costs. The Hong Kong Monetary Authority (HKMA) plans to start cutting its base rate this year, potentially affecting banks’ profit margins.

Key Points:

  • Hong Kong’s banks reported bumper profits in 2023 due to record interest rates and increased demand for banking services.
  • Pre-tax profit for retail banks increased by 62.1% in 2023, compared to 18.7% in 2022.
  • The number of negative equity cases doubled in 2023, posing risks to banks.
  • The banks’ net interest margins increased to 1.68%, the highest in four years.
  • However, the proportion of bad or doubtful loans also rose, indicating a shaky economy.
  • The HKMA plans to start cutting its base rate, which may impact banks’ profit margins.

Hong Kong’s retail banks experienced significant profits in 2023, marking their second consecutive year of success. This growth was attributed to higher funding costs that increased net interest margins, as well as an overall recovery in post-pandemic business activity. Pre-tax profit for these banks rose by 62.1% in 2023, compared to 18.7% in the previous year when pandemic-related restrictions were still in place. The Hong Kong Monetary Authority (HKMA) praised the industry’s performance, highlighting the robustness of the banking sector, strong profitability, and deposit growth. This marked a positive turnaround for Hong Kong’s banks, which endured three years of compressed margins and economic slump due to the Covid-19 pandemic and anti-government protests in 2019.

The banks’ net interest margin, which indicates the difference between loan rates and deposit rates, reached its highest level in four years at 1.68% in 2023. This was an increase from 1.31% in 2022 when the HKMA began raising interest rates in line with the US Federal Reserve’s tightening monetary policy. However, the increase in profitability also came with challenges. The proportion of bad or doubtful loans rose as businesses faced higher funding costs in an uncertain economy. The ratio of bad loans to total lending increased to 1.61% by September 2023, up from 1.4% in the previous year. Lenders such as HSBC, Standard Chartered, and Bank of East Asia made provisions for bad debts related to mainland China’s struggling real estate sector.

In addition to the increase in negative equity cases, which doubled to 25,163 by the end of 2023, banks faced potential risks. Negative equity occurs when the value of a property falls below the outstanding mortgage. Most of these cases were related to bank staff housing loans under a mortgage insurance program. The unsecured portion of these loans rose to HK$7.3 billion, and the delinquency ratio increased to 0.03%. Despite these challenges, the HKMA expressed satisfaction with banks’ risk management policies, stating that bad debt levels remained low.

The HKMA is expected to begin cutting its base rate in line with the US Federal Reserve, leading to potential challenges for banks. Lower interest rates may offer relief to struggling businesses and mortgage borrowers, but they also result in thinner profit margins for banks. The HKMA has increased the base rate by 525 basis points since March 2022. However, with the anticipation of lower rates and slower inflation in the American economy, the banks’ plump margins may not continue in the future.

The HKMA highlighted the banks’ capital adequacy ratio of 20.9% at the end of 2023, compared to 20.1% at the end of 2022. Total deposits in the banking system increased by 5.1% in 2023, and loans dropped by 3.6%. The enhancement measures of the Wealth Management Connect scheme, set to be implemented in February 2024, are expected to boost the wealth management business of local banks. The scheme allows residents in the Greater Bay Area to invest in Hong Kong’s wealth-management products, with an increased investment limit and expanded product sales coverage.

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