HONG KONG: Hong Kong banks on average saw their pre-tax profit decrease by 2.8 per cent last year due to a drop in loan demand and increase of bad debt, making it the worst year for the local banking sector since the global financial crisis in 2008, according to the Hong Kong Monetary Authority (HKMA).
HKMA deputy chief executive Arthur Yuen admitted banks would continue to face a challenging year in 2016 due to a volatile investment climate and China’s economic slowdown but allayed fears by pointing out that the local lenders’ capital quality and risk management systems are world-class.
“Pre-tax profit of local banks went down slightly, by 2.8 per cent, last year as a result of narrower interest rate margins, a drop in loan demand and worsening asset quality,” he said in a media briefing on the banking sector’s performance last year.
“However, the capital adequacy ratio of local banks as of the end of September had increased to 18.1 per cent, which is higher than the 16.8 per cent a year earlier. This is up to the highest international standards. The local banking sector is still very stable and resilient,” he said.
The banking sector’s profit drop in 2015 compares with an average 3.7 per cent pre-tax profit growth in 2014. This is the first profit decline since the global financial crisis in 2008, when pre-tax profit fell more than 30 per cent due to a drop in valuation of investment portfolio, he said.
The falling profitability came as the net interest margin – the gap between borrowing cost and interest income – narrowed down to 1.32 per cent last year, compared with 1.40 per cent in 2014.
Total loans grew only 3.5 per cent last year, the lowest since 2009 and down from 12.7 per cent in 2014.
Yuen blamed it on the devaluation of the yuan since August.
The People’s Bank of China devalued the yuan by 2 per cent on August 11. The currency has lost over 5 per cent against the US dollar since.
“We found many Hong Kong individuals and companies converting their yuan deposits into Hong Kong dollar or other currencies from September to November, using the money to repay their US dollar or Hong Kong dollar loans. This is natural given the devaluation, but the conversions and loan repayments have caused total loan growth to decline as a result,” he said.
“The situation has stabilised from December as the yuan has turned more stable.”
Banks’ profits also fell due to an increase of provisions that were needed to be made as a result of worsening asset quality. Classified loan ratio – the proportion of bad and doubtful loans to the total loan amount – had increased to 0.65 per cent as of the end of September, from 0.52 per cent in 2014.
The proportion of bad and doubtful loans to mainland Chinese-related companies were even higher at 0.77 per cent at the end of September, from 0.57 per cent in 2014.
“The trend may continue and banks would need to do more provisions but the level is not alarming,” Yuen said.
“We have experienced some very good years when the asset quality was extremely good but we can’t always be in that cycle. We have already told the banks to prepare for the asset quality to worsen and the local banking sector is well prepared for it.”
Local banks, he added, still have a lot of opportunities in the offshore yuan business as the city has a large pool of yuan although it has shrunk from the peak.
“It is true that the overall offshore yuan pool has shrunk but Hong Kong can still provide yuan liquidity for other yuan centres,” he said.
