Time deposits stoke worries for bankers

PUBLISHED : Thursday, 03 September, 1998, 12:00am
UPDATED : Thursday, 03 September, 1998, 12:00am

The latest figures from the Bank for International Settlements show a sharp decline in lending by foreign banks in Hong Kong, prompting people to worry again about an outflow of foreign capital.

This needs to be put into perspective. Much of the decline is in foreign-currency business for which Hong Kong is used as a booking centre and which has little other impact on the SAR.

Foreign banks have also pulled out of local-currency lending to some degree, but this does not necessarily represent an outflow. Money advanced by Japanese and European banks was mostly raised from domestic banks through the local interbank market.

The shift only means that the bigger domestic banks have taken up the slack and are lending more to borrowers directly rather than funnelling it through the interbank market.

The dilemma for foreigners is an obvious one. As the first chart below shows, they at one time enjoyed a wide margin between what they paid on the interbank and what they charged on their loans, but things swung the other way after the regional financial crisis broke last summer.

They have frequently since that time been forced to pay more for their funds than they could get from lending the money and, with their head offices running scared about Asian risk, they naturally wanted out.

The Hong Kong banking system was certainly strained a little by this at the turn of the year, and some of the foreigners had to be cajoled not to jump too quickly.

But the big squeeze on the banks is a different one now. Deregulation of deposit rates has produced a big shift into time deposits which, as the second chart shows, are still rising rapidly, while demand and savings deposits are declining. These time deposits carry higher interest rates than other forms of deposits.

As a simple exercise, assume that demand deposits pay nothing and assign a weighting to time and savings deposit rates equal to their proportion of overall deposits. The result is a rough estimate of the weighted average costs of funds for banks.

The third chart shows that this is again beginning to squeeze them as it did at the turn of the year.

The margin of HSBC's prime rate over this weighted deposit rate is much less than the historical average and will have an impact on earnings if it continues.

But few domestic banks are complaining at the moment about weak-kneed foreign competitors prepared to destroy viable businesses in a wild panic to get their money out.

The problem for the banks at the moment is not the nasty foreigners. It is the demanding local depositors.