The bad times are far from over for Hong Kong. The financial crisis that has engulfed Asia is continuing to put enormous pressure on the once-vibrant local banking sector. Profits are down and bad and doubtful loans have soared. But in spite of the deteriorating operating environment, bankers are scrambling to maximize existing sources of income and to identify new ones.
Property loans traditionally account for the largest proportion of the local banks' portfolio. The Hong Kong Monetary Authority (HKMA), the territory's quasi-central bank, estimates average exposure to the sector at 40% of total domestic loans - a limit which, until July, it had maintained as the official recommended ceiling on bank lending. The authorities now feel that an across-the-board guideline has served its purpose. Lifting the guideline, HKMA deputy chief executive David Carse said: "The focus should be on internal risk management by institutions themselves and on the market discipline which can be exerted through public disclosure."
Amid tumbling property prices and a high-interest-rate environment, banks needed no prodding to be prudent. Chairman and chief executive of the Bank of East Asia David Li says: "We are reassessing our clients. We have asked some of them to bring in more collateral as security." The bank, which has a reputation for being well run and having high-quality management, is the territory's second-biggest local financial institution by assets. It sits on huge property loans. Its exposure to the sector accounted for 50.9% of its total portfolio at the end of last year - rising to 52.9% by June this year. Li says: "We are exercising the greatest caution and making more than adequate provision for non-performing loans. Our stance is deliberately very prudent."
Some banks have actually increased their lending to property. Liu Chong Hing Bank's mortgage loans rose by 2.8% in the first quarter of this year. The increase sprang mainly from its participation in a number of home-ownership schemes and projects by major developers. The bank, which provides services to a faithful client base of mainly small and medium-size enterprises, has been expanding its market share in residential mortgages. The bank's executive director, Nam Lee-yick, says: "The quality of property borrowers has improved. There are far fewer speculators these days."
The continued importance of the property sector to the banking industry is reflected in the latest official statistics. Across the industry, property loans increased by 1.2% in the June quarter following a 0.8% rise in the March quarter while lending to most other sectors contracted. More specifically, lending for the purchase of apartments under government housing schemes rose sharply by 11.8% in the June quarter - a measure of the reliance of many financial institutions on mortgage business as the main driver of earnings growth. This reliance was described by Thomson BankWatch, which specializes in bank-risk analysis, as a systemic weakness of the industry.
But banks are better protected than appearances suggest. About 53% of local property lending is for residential mortgages where the delinquency rate is low compared with those of other cities in Asia. A government survey of local banks earlier in the year showed that only 0.65% of all mortgage payments had been overdue for more than 30 days.
But with unemployment in Hong Kong rising and no respite in sight, banks are hedging their bets and looking farther afield for new sources of income. No stone is being left unturned in the quest for new business. Wing Lung Bank and Liu Chong Hing Bank are both looking at opportunities left by the retreat of Japanese banks from the territory in recent months. The mounting financial crisis at home has led to a reversal of the flow of Japanese capital. Thus, institutions such as Wing Lung Bank and Liu Chong Hing Bank have been able to acquire assets at good prices from Japanese institutions that are scaling down their business in Hong Kong. In fact, in the first five months of this year, most new business for Wing Lung Bank was in the form of purchases in the secondary market of loans made to blue-chip conglomerates by Japanese banks. Liu Chong Hing Bank has been active in that area too. Its executive director, Nam Lee-yick, says: "We've been bidding for business left by Japanese banks that went home." Pauline Loong