Property valuations could offer banks a chance to ditch boring image
Banks are boring. And with the growing 'commoditisation' of their products and services - by which all are becoming identical except for brand names - they're sure to become even more boring in future.
But that's just the way regulators, investors and even most customers prefer their banks to be. Boring equals stable (no flash fires in the financial system for regulators to hose down), dependable (the regular dividend cheque is in the mail), and reliable (standard no-frills tax loans and travel insurance approved online and on time).
Property companies are not boring. They bring the Cote d'Azur to Kowloon, hire and fire armies of construction workers and sub-contractors in cyclical waves, and stun investors with profits or losses that rise and fall with property values on the economic tide.
So what about banks that also own property? Are they poised to shed their boring image.
The short answer is no. But there are changes under way that could, momentarily at least, disturb the dull predictability of the banking sector.
The question needs asking because, from January 1, new accounting standards will for the first time require banks to obtain independent valuations for their investment properties. HSBC and Hang Seng, it must be noted, already do so voluntarily.
The immediate result of the accounting change, which is applicable to all companies and not just banks, will for the most part not have a big impact on asset values and reported profits in the industry. Investment properties generally account for only a small fraction of Hong Kong bank assets and even large fluctuations in property values - which will have to be taken through profit and loss accounts - will barely register on the bottom line.
Second, the new rule will not apply - for the moment at least - to owner-occupied premises. These may continue to be reported at cost less depreciation.
Things might have been different for Bank of China (Hong Kong). Fortunately, Hong Kong's biggest banking landowner got a mass valuation for all of its 2,100 properties, including the 74-storey Bank of China Tower, out of the way in 2001. Its balance sheet next year and P&L account will therefore be little changed by the new accounting rule.
Not without reason, concerns were raised at the time that the pre-listing valuation exercise left the restructured BOCHK vulnerable to shifts in property prices, since total shareholder funds of $52.17 billion included property assets valued at the time at $20 billion.
A subsequent cycle of charges and write-backs amply vindicated concerns that making an investment in the bank came perilously close to making an investment in Hong Kong property. Within six months of its listing, the group produced a profit statement for 2002 that included a charge of $940 million arising from a downward valuation of its properties, followed by a further $789 million charge last year.
By June this year, revaluations, disposals and depreciation charges had reduced the net book value of its premises to $16 billion.
That's the sort of volatility that regulators and investors do not want to see, and provides a sound argument for regular revaluations of the entire property portfolio, and not just of investment properties.
Were this idea to take hold in the wake of the changes relating to investment properties, the impact on some Hong Kong banks might be considerable.
Bank of East Asia, for example, disclosed an owner-occupied property portfolio valued at $3.96 billion in its annual report for last year, of which $2.55 billion was stated at cost - the bank was not telling this week when those properties were bought - and a further $1.23 billion was last valued by directors in 1989.
Calculating a true net worth for the bank, given this incomplete picture, is clearly a challenging task. If BEA, or others like it, were to declare that it would apply the new accounting rule to both its investment properties and its premises - which they are free to do voluntarily - you can be sure there would be a scramble among investors to anticipate the outcome.
The results for share prices would then be far from boring.
