Poor lending hits 2015 profits for Hong Kong banks

Hong Kong lenders were hit by weaker profitability in 2015, as margins were squeezed by rising deposits but slower loan growth, the SAR's de facto central bank said on Friday.

Classified mainland loans of Hong Kong banks were on the rise, but the banking system was cushioned with excess liquidity ahead of a turning credit cycle.

Operating profit for the Hong Kong banking sector declined by 2.8 percent last year, compared with a 3.7 percent increase in 2014, the Hong Kong Monetary Authority announced on Friday. The net interest margin of the sector edged down by 0.08 percentage points to 1.32 percent at the end of 2015, from 1.4 percent in 2014.

Total deposits grew at 6.7 percent last year — slower than the 9.7 percent in 2014 — but still outpaced the 3.5 percent year-on-year increase in total loans, the slowest rise the sector has seen in at least five years. In 2014, banks in Hong Kong recorded 12.7 percent growth in the loan book.

Meanwhile, the classified loan ratio stood at 0.65 percent at the end of September 2015, compared with 0.52 at the end of 2014. During the same period, classified loan ratio of mainland-related loans in Hong Kong banks climbed from 0.57 percent to 0.77 percent.

"Credit growth is slowing in Hong Kong, particularly in the second half last year," said Arthur Yuen, deputy chief executive of the HKMA, adding the annualized loan growth ratio in the first six months was 11 percent, compared with a 3.7 percent decline at the end of September.

According to Yuen, in the second half, many borrowers with foreign currency liabilities sold renminbi in their portfolio to repay dollar debts in the face of the sharp depreciation of the Chinese currency.

"But provided a considerable amount of such deals have been done and renminbi exchange rate has stabilized lately, we don't see any catalyst for the trend to continue, for now," Yuen added.

As for asset quality, Yuen said despite some individual default cases, there is no sign of "wide-spectrum credit deterioration". Although the classified loan ratio, especially related to mainland loans, have picked up a lot since June 2014, they are still "far below" the long-term average of 2.4 percent since 2000.

He emphasized that the SAR's banking sector has ample liquidity, with total capital adequacy ratio at 18.1 percent at the end of the third quarter. At September's end, the liquidity coverage ratio of big banks was 136.4 percent, while the liquidity maintenance ratio for smaller lenders was 53.6 percent – both "way above" the requirements of 60 percent and 25 percent, respectively.