Hong Kong banks reported their slowest profit growth in three years as falling net interest margins and rising bad debts offset wealth management revenue.
Data from the Hong Kong Monetary Authority shows that in the first nine months of 2024, the pre-tax profits of Hong Kong's 30 retail banks increased by 8.4% combined, lower than the 62% growth in 2023 and the 18.7% growth in 2022 (HKMA).
The data showed that in the first nine months of last year, banks' net interest margin (NIM) - the difference between the interest rate on loans and the interest on deposits - narrowed to 1.5%, compared with 1.67% in 2023. The net interest margin will be 1.31% in 2022, 0.98% in 2021, and 1.18% in 2020.
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"Bank profitability remains good, but this year we must pay more attention to the problem of bad debts and the increasing trend of financial fraud," Yuen Kwok-hang, deputy chief executive of the Hong Kong Monetary Authority, said at a media briefing on Wednesday.
Yuen Kwok-keung, Deputy Chief Executive of the Hong Kong Monetary Authority (HKMA). Photo: Jelly Tse alt= Yuen Kwok-keung, Deputy Chief Executive of the Hong Kong Monetary Authority (HKMA). Photo: Jelly These >
The sector's net interest margins compressed when Hong Kong's de facto central bank slashed the city's base interest rate by a full percentage point three times starting in September, in line with the Federal Reserve's rate cuts. The city's commercial banks have since followed suit, reducing borrowing costs for their best customers by 62.5 basis points.
As more businesses deal with higher funding costs amid economic uncertainty, the share of non-performing or doubtful loans has risen, putting more pressure on banks' balance sheets. As of September, this ratio expanded to 1.99% of total loans, compared with 1.89% in June, 1.5% at the end of 2023, 1.4% in 2022, and 0.88% in 2021.
Still, Yuan said, the banking industry "has sufficient collateral and risk management measures to manage risks." "Bad debts have not affected the profitability of Hong Kong banks."
Banks such as HSBC, Standard Chartered and Bank of East Asia continue to make provisions for non-performing loans related to the downturn in mainland China's real estate industry.
Data from the Hong Kong Monetary Authority showed that the number of negative equity mortgage loans surged 34% to 40,713 in September from 30,288 in June and 25,163 at the end of December. The year-end figure was the highest since 67,575 in the fourth quarter of 2003.
As of the end of last year, the bank's capital adequacy ratio was 21.8%, compared with 21.1% at the end of 2023.
Total deposits in the banking system increased by 7.1% last year, following growth of 5.1% in 2023 and 1.7% in 2022.
Loans fell 2.8% in 2024, following a 3.6% decline in 2023. Loans fell 3% in 2022, the first decline in two decades.
"In an era when interest rates are higher in Hong Kong (compared to the mainland and other markets), it is natural for loan demand to decline," Yuan said.
Improved market sentiment since September has helped increase banks' fee income from financial management, stock trading and insurance.
Hong Kong and mainland markets rose after the Federal Reserve cut its benchmark interest rate by half a percentage point on Sept. 18, the first rate cut in four years, followed by Beijing's stimulus measures aimed at supporting stocks and propping up the struggling property market.
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