HONG KONG: The de facto central bank warned lenders in the city that their "intense price competition" on mortgages isn't sustainable and may erode industry profit margins and increase risks.

Banks have cut home loan rates "to such an extent that they might not have given due regard to the reputation risk, interest rate risk and liquidity risk potentially associated with their pricing," Hong Kong Monetary Authority Deputy Chief Executive Y.K. Choi said in a letter to the Hong Kong Association of Banks, which was published on the HKMA website.

Mortgage rates in the city are the lowest in at least 19 years, which is as far back as records are available, as banks seek to offset slower demand for other types of credit. Lenders including Bank of East Asia Ltd and Standard Chartered Plc have been offering homebuyers costs as low as 3.25 percent below the benchmark rate they use for pricing mortgages.

"I wouldn't be too concerned about this," said Dominic Chan, a Hong Kong-based analyst at BNP Paribas Securities Asia Ltd. "This sounds more like a gesture than any concrete action to make banks tighten lending. It's the regulator's job to raise the alarm when home prices have gone up so much lately."

Choi said that once the cost to fund loans begins rising, banks may have to raise interest rates even faster. Banks' prime rates are currently 475 to 500 basis points above the Hong Kong Interbank Offered Rate, compared with the average spread of about 390 basis points over the past five years, he wrote. A basis point is 0.01 percentage point.

The central bank will approach individual banks to "understand their pricing strategy," Choi said.

The decline in Hong Kong mortgage rates has spurred a recovery in the housing market. Home prices in Hong Kong have climbed 26 percent this year, according to the Centa-City Leading Index, a weekly measure of residential values developed by Centaline Property Agency Ltd and the City University of Hong Kong.

The three-month Hong Kong Interbank Offered Rate (HIBOR) fell to 0.19 percent on September 7, the lowest since January 2005, after the city's central bank cut borrowing costs and spent $23 billion defending the currency's peg to the US dollar.

Bloomberg News

(HK Edition 09/19/2009 page2)