Hong Kong’s banks are having their worst time since the 2008 Global Financial Crisis, as profits plunged while bad debt soared amid the city’s worst recession in decades.
The average pre-tax profit among the city’s retail banks fell for the second year in 2020, plunging by 29.4 per cent, according to the Hong Kong Monetary Authority (HKMA). The ratio of bad and doubtful loans, known as classified loans ratio in Hong Kong, jumped to a four-year high of 0.84 per cent at the end of September, from 0.57 per cent in 2019. The outlook for 2021 remains dim.
“Local banks will continue to face a challenging time this year because the [ongoing] pandemic is [piling weight on] the city’s worst recession on record,” said HKMA’s deputy chief executive Arthur Yuen Kwok-hang during a press conference on the review of the city’s banking industry. “We are discussing with the banks to find a way which would safeguard the sector while helping the economy to recover.”
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The dismal picture of shrinking earnings and rising debt among retail banks draws a stark contrast with Hong Kong’s booming stock market and the bull run in the property market, underscoring how the city’s real economy marches to a different beat from its role as China’s offshore financial hub. Thousands of restaurants, retailers and other businesses have shut down, or are at risk of going under, saddling their owners with debts and unpaid bank loans during the recession.
Hong Kong’s economy shrank 3 per cent in the fourth quarter, resulting in a full-year decline of 6.1 per cent in 2020, according to advance estimates released by the Census and Statistics Department.
The city last saw a similar level of decline in 1998 when its gross domestic product contracted by 5.1 per cent, as the Asian Financial Crisis battered the local economy.
Net interest margin, the gap between borrowing costs and interest income, have narrowed in Hong Kong, which translates to falling profitability for banks that rely on the gap for their profits. The margin narrowed to an average of 1.18 per cent in 2020, from 1.63 per cent in 2019. Total loans grew only 1.2 per cent last year, less than a fifth of the 6.7 per cent increase in 2019.
HKMA has instructed banks to extend their six-month loan repayment holiday for small businesses until April, providing more breathing space for some of the biggest job providers in the city.
Under the concession which started last May, around 4,000 qualified corporate borrowers are allowed to repay only the interests on their loans, but not the principal. Many Hong Kong legislators have warned of a surge in bankruptcies if the repayment holiday ends in April.
Still, Hong Kong’s banks are weathering the economic malaise from the pandemic better than other major banking centres around the world, where the bad debt ratio have risen to between 1 per cent and 2 per cent, higher than the city’s ratio.
“The banking sector overall is still holding well, as the capital ratio stood at 20.3 per cent and the total deposits increased 5.4 per cent last year, among the highest worldwide,” Yuen said. “The local banking sector is still very stable and resilient.”
Adding to the challenging times for banks, the industry is becoming more competitive with the entry of eight virtual banks, or financial institutions that are licensed to operate purely online without the need for physical bricks-and-mortar branches. The eight banks have attracted 420,000 customers with a combined HK$15 billion in deposits and HK$1 billion in loans.
“This is not substantial, but it is good to see that the virtual banks are having a stable growth,” Yuen said.
He said the HKMA this year will continue to work with People’s Bank of China to allow tourists to use digital currency when travelling across the border.
(Corrects the scope of bad loans ratio in second paragraph to four-year high)