Future bright for the banks
RELIEF to the torpid summer mood came last week in the shape of a steady flow of bumper figures from the banking industry. Record interim results, accompanied by dividend boosts and positive responses by the share market justified the confidence that had been widely expressed in the sector's outlook during the months running up to the announcement of the figures.
In fact, the performance of many of the companies exceeded even the most optimistic forecasts and left analysts doing their sums again on how the sector will close the year after such a bountiful opening six months. With the interim reporting period getting into full swing, the figures which the banks have released leave little doubt that the sector will be the outstanding feature of the season.
These strong figures from such an important force in the overall market should provide further evidence for those people convinced of the underlying strength of corporate Hong Kong, especially as the outlook for the sector remains bright leading up to and through the period of the handover of the territory to China.
The reassessment process which was triggered by the record figures was no where stronger than with HSBC Holdings which set the tone for the industry with a 34 per cent boost in pre-tax profits to GBP2.32 billion (about HK$27.5 billion) and followed it up with a massive 62 per cent rise in the interim payout to shareholders.
British analysts in particular were caught on the hop by the strength of the result and rapidly upgraded their forecasts for the remainder of the year and beyond.
The result gave the City of London added reason to rate it as an Asian bank with vast potential for expansion and alter its traditional view of it as British bank with an involvement in Asia.
The re-rating also took place despite the caution felt in London about the bank's dependence on Hong Kong - a caution felt stronger in London than in other leading financial centres.
A feature of the results which could escape attention was the hefty increases made for bad and doubtful debts. Amid Hang Seng's set of scorching figures, which included a 34.4 per cent growth in attributable profit, was a trebling of the bad debt provision to $220 million.
The smaller players also felt the need to bolster this provision.
Perhaps the most outstanding example of this was at FPB Bank Holding Company which lifted the provision from $23.2 million to $68.9 million.
Other banks are likely to follow suit as their results are rolled out, begging the question why the banks at this time need to put this protective measure into place.
It could certainly be viewed as a prudent move if there were any firm indications of a serious deterioration in credit quality caused by economic factors.
However, this does not seem to be the case and certainly there appears to be no reasons for concern on the horizon which could justify such a massive increase in the provision. The rise also clearly outstrips the need for greater cover generated by the strong growth in loans during the first half.
It is much more likely that banks are attempting to smooth earnings by flattening out the rate of growth through the inclusion of these provisions at this time.
There has been a cooling off in the factors which have driven the banks' performances during the first six months - the coming together of widening net interest margins and attractive loan growth.
This may cause investors to be more selective, especially after the banks' rally, but the sector as a whole will remain a primary focus of interest and there remains ample room for growth among the smaller players.