HKMA: Evergrande risk controllable to banking system

The Hong Kong Monetary Authority (HKMA) on Wednesday said the city's banking system does not have high exposure to the debt-ridden developer China Evergrande, but noted the current challenging credit risk environment.

Necessary provisions have been made as the city's de facto central bank earlier asked lenders to strengthen their risk management of highly leveraged mainland developers, said Arthur Yuen Kwok-hang, deputy chief executive of HKMA.

Yuen's remarks followed a Hong Kong court's order for winding up of the long-embattled property giant China Evergrande, which dealt a fresh blow to the mainland's ailing real estate sector on Monday.

Yuen said that banks in Hong Kong possess profitability and the ability to absorb provisioning costs, but added that the credit environment is facing headwinds.

According to HKMA, the banking sector's classified loan ratio — the proportion of loans deemed to be in danger of default — rose to 1.61 percent at the end of September last year, up from 1.5 percent as of June.

The ratio for mainland-related lending also increased to 2.68 percent during the period.

On a positive note, the city's banks saw their pre-tax profit jump 62.1 percent year-on-year in aggregate last year as net interest margin widened amid monetary tightening.

Total bank deposits rose 5.1 percent last year, compared with a 1.7 percent increase in 2022. Meanwhile, loans in the banking system fell 3.6 percent in 2023. That compared with a decrease of 3 percent in 2022.

In looking ahead to the performance of Hong Kong banks, Paul McSheaffrey, senior bank partner of KPMG Hong Kong, said in the firm's latest report that this year "will not be a year of growth" for the 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.