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

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

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.

Pre-tax profit among the city’s retail banks increased by 62.1 per cent in aggregate last year, compared with 18.7 per cent in 2022 when Hong Kong’s business activities were still hobbled by anti-Covid controls, according to data provided by the Hong Kong Monetary Authority (HKMA).

“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.

Arthur Yuen Kwok-hang, the deputy chief executive of the Hong Kong Monetary Authority (HKMA), speaking on 27 July 2023. Photo: Enoch Yiu.

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.

Advertisements posted on a shuttered store in Hong Kong on January 24, 2021. Photo: Bloomberg
China Evergrande Group has been ordered to wind up after a Hong Kong High Court approved a petition by creditors on Monday to liquidate the world’s most indebted property developer, in the biggest such case seen in the city.

“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.

Residential units under construction in Hong Kong’s Tsuen Wan area on 15 August 2017. From left: CK Asset’s Ocean Supreme, Chinachem Group’s Ocean Pride and Parc City projects. Photo: Xiaomei Chen

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.

A queue at HSBC’s branch in Mong Kok on 5 January 2023 as customers waited to withdraw newly minted currency notes for the Lunar New Year celebrations. Photo: May Tse.

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.

Yuen said the enhancement measures of the Wealth Management Connect scheme, to be implemented on February 26, will boost the wealth-management business of local lenders. Introduced in September 2021, the cross-border investment scheme has got off to a slow start because of the closed border with mainland China during the Covid-19 pandemic.
The relaxation will allow ­residents in the nine Guangdong provincial cities that make up the Greater Bay Area to invest up to 3 million yuan (HK$3.3 million) each in Hong Kong’s wealth-management products, triple the previous limit under the scheme. It will also expand product sales under the scheme to include Greater China equity funds.

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