Hong Kong’s Banking Sector Faces Challenges Amid Slowing Profit Growth
The banking industry in Hong Kong is navigating turbulent waters, with profit growth slowing down to its lowest pace in three years. According to data from the Hong Kong Monetary Authority (HKMA), the aggregated pre-tax profit among the city’s 30 retail banks increased by a mere 8.4% in the first nine months of 2024, a significant drop from the 62% jump in 2023 and 18.7% in 2022.
Net Interest Margins Under Pressure
One major contributor to this slowdown is the narrowing of net interest margins (NIMs). The NIM, which represents the difference between the rate charged on loans and the interest paid for deposits, decreased to 1.5% in the first nine months of 2024, down from 1.67% in 2023 and 1.31% in 2022. This compression is largely attributed to the HKMA’s decision to slash the city’s base interest rate by a full percentage point in three cuts starting in September, mirroring the moves by the US Federal Reserve.
Rise of Bad Debts and Financial Scams
Another challenge facing Hong Kong’s banks is the increasing trend of bad debts and financial scams. The proportion of bad or doubtful loans has risen, as more businesses struggle with higher funding costs amid a shaky economy. The ratio widened to 1.99% of total lending as of September, up from 1.89% in June and 1.5% at the end of 2023. While the HKMA’s deputy CEO, Arthur Yuen Kwok-hang, expressed confidence in the banking sector’s ability to manage these risks, the issue remains a pressing concern.
Wealth Management and Fee Income Provide a Silver Lining
Despite these challenges, Hong Kong’s banks have found some respite in wealth management and fee income. The improved market sentiment since September has boosted fee income from stock trading, insurance, and other sources. This has helped offset some of the losses incurred due to lower NIMs and rising bad debts.
Capital Adequacy Ratio Remains Strong
The banking sector’s capital adequacy ratio stood at a robust 21.8% at the end of last year, up from 21.1% at the end of 2023. This suggests that banks have sufficient buffers to absorb potential losses.
Deposit Growth and Loan Decline
Total deposits in the banking system rose 7.1% last year, after increasing 5.1% in 2023 and 1.7% in 2022. However, loans dropped 2.8% in 2024, following a 3.6% decline in 2023. This marks the second consecutive year of loan decline, a trend attributed to higher interest rates in Hong Kong compared to the mainland and other markets.
As the banking sector navigates these challenges, it remains to be seen how it will adapt to the changing landscape and maintain its profitability in the face of rising bad debts and financial scams.
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