Rising uncertainty over trade war could weigh on bottom lines at Hong Kong’s banks, KPMG says

Chad Bray
Rising uncertainty over trade war could weigh on bottom lines at Hong Kong’s banks, KPMG says

Rising interest rates helped boost Hong Kong banks as the city’s economy slowed last year, but heightened uncertainty from an escalating trade war between the United States and China could weigh on their performance in 2019, according to KPMG.

Operating profit before impairments at the city’s licensed banks rose 15 per cent to HK$268 billion (US$34 billion) last year, from HK$234 billion in 2017, the accounting giant said. Total revenue at Hong Kong’s lenders increased 11.2 per cent to HK$445 billion.

The Hong Kong Monetary Authority raised the city’s base lending rate four times in 2018, moving in lockstep with increases by the US Federal Reserve.

That allowed the city’s banks, including HSBC, Hang Seng Bank and Bank of China Hong Kong, to increase their lending rates in September for the first time since the global financial crisis despite a slower pace of economic growth last year.

Further rate increases are not likely as the Fed is generally expected to cut rates at least once in the second half of this year, said Paul McSheaffrey, KPMG China’s head of banking and capital markets, Hong Kong. Trade tensions are likely to weigh on loan growth, he said.

“Tensions on trade will cause the rate of loan growth to decline. We still expect the total balance of loans to increase but I think the rate of loan growth is probably more muted. That is really all to do, in my view, with uncertainty,” McSheaffrey said. “People are still getting used to this. People need certainty before they can invest or increase the levels that they’re willing to invest and need lending to help with that investment.”

US President Donald Trump has placed tariffs on nearly half of all goods imported from China and threatened to put 25 per cent tariffs on another US$300 billion of Chinese-made products later this year. China has retaliated with its own tariffs.

Economists and analysts have said the risk of a global recession will rise – Morgan Stanley has said possibly within three quarters – if tensions between the world’s two largest economies remain high and the trade war is prolonged.

Will the US-China trade war fuel the next global financial crash?

As the spat intensified last year, the total growth in loans and advances at Hong Kong’s banks climbed 3.5 per cent to HK$9.03 trillion in 2018, KPMG said. That compared with 14.9 per cent growth in 2017.

Credit quality improved slightly at the city’s bank’s last year, with the average impaired loan ratio at 0.50 per cent, according to KPMG. The ratio stood at 0.51 per cent in 2017.

McSheaffrey said the banking sector’s total amount of assets stood at about HK$18 trillion last year, well above the amount of loans.

“What that tells me is the capacity for Hong Kong banks to lend is intact. There is a capacity on balance sheets to lend more, there’s liquidity and there’s capital,” McSheaffrey said. “Hong Kong banks, and the banking sector as a whole, has a strong balance sheet and that’s a really good position to be in.”

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