US worries may slow banks' profit growth

PUBLISHED : Monday, 31 March, 2008, 12:00am
UPDATED : Monday, 31 March, 2008, 12:00am

Hong Kong lenders are expected to see slower profit growth this year amid the economic downturn in the United States and a more challenging operating environment.

Most local banks have reported results for last year that varied widely. Profit at Citic Ka Wah Bank, an arm of listed Citic International Financial Holdings, plunged 88.41 per cent to HK$106 million, while that at Hang Seng Bank jumped 51.5 per cent to HK$18.24 billion.

The mixed bag reflects bank holdings of structured investment products hit by subprime troubles, although core earnings were strong.

All Hong Kong-based lenders, except Hang Seng, posted net losses or write-downs on their exposure to collateralised debt obligations (CDOs) and structured investment vehicles to varying degrees. They had a combined provision of more than HK$64 billion.

Collateralised debt obligations are pools of mortgages, corporate loans or commercial and property loans sliced into bonds with varying credit ratings and maturities.

Structured investment vehicles, usually set up by banks and financial institutions, raise funds by issuing short-term commercial paper to finance long-term investment with higher yields. The value of these instruments has shrunk as investors shunned mortgage-related debt when the subprime crisis surfaced.

'The impact of [subprime-related] provisions on banks' profitability will be relatively small this year,' said William Wong Kwong-wai, an analyst at BOCI Research. 'How to maintain strong loan growth and net interest margins will be the challenge.'

Associate director Terry Sham at Standard & Poor's Ratings Services said individual banks might need to make more provisions this year but it would depend on the size and quality of their remaining exposure to structured investment products.

'Hong Kong's banking sector is strong enough to withstand the impact of subprime woes, as their direct exposure to subprime is limited,' he said. 'But their profitability will be under pressure as last year's growth momentum in loans and fee income will be difficult to sustain in 2008.'

Mr Sham said the slowdown of the US economy was likely to affect loan demand in Hong Kong, particularly by sectors that export to the US.

Hong Kong lenders with an increasing presence on the mainland also are likely to see a slowdown of loan growth amid the tightening monetary policy there.

Mr Sham said individual lenders, particularly those with relatively more net free funds, may see a compression of their net interest margins given low interest rates.

'The lending environment may not be too pessimistic this year as there are a lot of infrastructure projects that may have to seek financing,' said an analyst at a European brokerage. But strong fee income is unlikely to be repeated this year because financial markets are not as strong as last year.

'Earnings growth is likely to be slower than last year,' he added.