Hong Kong’s banks report bumper profits in 2023 as record interest rates swell margins

Hong Kong’s banks reported their second straight year of bumper profits, as higher funding costs bloated their net interest margins, while a general recovery in post-pandemic business activity increased the demand for loans.

“The banking industry in 2023 remained robust, boosted by a healthy capital adequacy ratio, strong profitability and good growth in deposits,” the HKMA’s deputy chief executive Arthur Yuen Kwok-hang said.

2023 marked the second year of growth for Hong Kong’s banks, after three straight years of compressed margins and slump, as the recession wrought by the Covid-19 pandemic and the anti-government protests of 2019 crimped demand for loans. Pre-tax profit fell 19.8 per cent in 2021, following a 29.4 per cent contraction in 2020 and a drop of 0.6 per cent in 2019.

The banks’ net interest margin – the gap between the rate charged on loans and the interest paid for deposits – widened last year to the fattest in four years at 1.68 per cent, the HKMA’s data showed. The margin was 1.31 per cent in 2022 as the HKMA began its 525-basis point rate increase in March that year in lockstep with the Federal Reserve’s tightening monetary policy. The margin was 0.98 per cent in 2021 and 1.18 per cent in 2020.

The proportion of bad or doubtful loans rose, as more businesses grappled with higher funding costs amid a shaky economy. The ratio widened to 1.61 per cent of total lending as of September, compared with 1.4 per cent in 2022 and 0.88 per cent in 2021. HSBC, Standard Chartered, Bank of East Asia and other lenders in the city continued to make provisions for bad debts related to mainland China’s slumping real estate sector.

“Even though the bad debt levels have increased slightly, the level remains low,” said Yuen, adding that the de facto central bank was satisfied with the banks’ risk management policies. “Banks have taken a very prudent approach to managing their asset quality.”

The plump margins may end this year, as the HKMA is expected to start cutting its base rate in lockstep with the US Federal Reserve, amid slowing inflation in the American economy. While lower rates offer a breather to struggling businesses and mortgage borrowers, they mean thinner margins for banks.

The HKMA has increased the base rate by 525 basis points since March 2022, even as the city’s economy was mired in a recession. Since the local currency has been pegged to the US dollar since 1983, local interest rates move in lockstep with those in the US.

Yuen said the banks’ capital adequacy ratio stood at 20.9 per cent at the end of last year, compared with 20.1 per cent at the end of 2022.

Total deposits in the banking system rose 5.1 per cent in 2023, compared with a 1.7 per cent increase in 2022, slower than the 4.6 per cent increase a year earlier.

Loans dropped 3.6 per cent in 2023, compared with a drop of 3 per cent in 2022 – the first decline in two decades – and a 3.8 per cent rise in 2021.