Banks can look forward to better times, says HG Asia
THE worst is over for Hong Kong banks, says HG Asia.
Improved interest margins and lending would herald a better year, it said.
Presenting a bullish view, the brokerage firm's recent report on the banking sector concluded that the industry was marching towards a cyclical upturn.
Last year's interest rate deregulation and the deliberate attempt by the Hong Kong Association of Banks (HKAB) to narrow the spread between the prime lending rate and regulated deposits have ripped 20 to 30 basis points off banks' interest margin.
Interest margin refers to the differential between interest paid to obtain the funds and interest received through lending.
Recent favourable US economic data convinced market observers that more than one interest rate rise this year was unlikely.
The stable environment fostered a reasonable spread between the prime lending rate and HIBOR (Hong Kong interbank offered rate), the rate at which banks procure funds, standing at 2.87 per cent at the end of March.
This was the lowest level relative to the prime since the middle of last year, the report said.
The interest rate deregulation would not exert too much pressure on the margin this year.
'With only 25 per cent of deposits now held in the form of demand or savings money, the scope for this base to shrink further is much diminished,' the report said.
As such, margin stabilisation should begin in the second half of the year.
On the lending side, the report said the sector 'probably just moved past the bottom of the trough in terms of loan growth'.
With the interest rate threat receding, banks reckoned that residential property prices had bottomed.
Relaxing their mortgage policies and entering into co-financing deals with developers were signs of banks' renewed confidence.
Coupled with the funding needs for local infrastructure projects and related developments and continued strong demand for trade finance, the outlook for loan growth this year, particularly in the second half, looks bright.
The generally well-capitalised banks which have increased their presence in China substantially are also set to enjoy lending opportunities there.
Winners in 1994 were traditional banks that relied on conventional lending business.
The principal losers were larger banks whose diversity and higher exposure to the volatile income streams such as securities dealing depressed their profits.
So 1994 could probably best be described as the year of the plain vanilla bank, the report says.
