bodyType

customContents

entityId

entityUuid

articlePageQuery

filter

article

articleBaseAdvertisingInfoArticle

articleListArticle

articleSeoArticle

hooksArticleAcknowledgementGateOverlayArticle

hooksTrackPageViewArticle

hooksContentInterestArticle

articleLinkingDataContent

hooksAmpRedirectArticle

articleSchemaContent

liveArticle

advertZone

sentiment

contentLock

topics

types

sections

paywallTypes

createdDate

publishedDate

urlAlias

moreOnThisArticles

sponsorType

commentCount

authorLocations

authors

corrections

displaySlideShow

multimediaEmbed

printHeadline

seriesContainer

articleSpeeches

socialHeadline

headline

images

flag

firstTopic

glossary

flattenTypeIds

image

relatedLinks

relatedNewsletters

__typename

sponsor

pdfFiles

seriesReverseOrder

series

disableOffPlatformContent

published

updatedDate

summary

subHeadline

body

keywords

readingTime

customTimezone

liveContents

Amanda Lee

Local lenders expected to announce lower profits, analysts say
Hong Kong banks are expected to show lower earnings because of the ongoing subprime mortgage crisis engulfing the United States, according to analysts.
'I think a lot of people revised their forecast for Hong Kong banks as soon as they saw what happened with the global banks,' said Patrick Ho, head of corporate research for Asia-Pacific at UBS Wealth Management.
'Not many people expected such a large amount of write-downs due to subprime six months ago and they didn't expect this kind of capital raising exercise from the large global banks,' Mr Ho said.
Analysts said some of the global bank stocks were expensive because the stock market remained volatile. Army Yan, head of research at fund of hedge funds K1 group in Hong Kong,  said that some international banks were overvalued.
'We are not convinced with their off-balance sheet items and there might be further write-offs. If the banks are to raise interest rates then their share prices seem costly to us,' Mr Yan said.
Equity values may drop again if the banks make further provision for potential write-downs. The present asset values and profits of these banks may not be enough to cover future increase in liabilities caused by a  rise in interest rates.
Further subprime related bad news might also trigger downward pressure on share prices. 'At present we would avoid picking any banks that have exposure to subprime and structured credit business. The financial sector is not in a healthy state,' Mr Yan said.
The subprime crisis  is expected to continue haunting Hong Kong banks in the second  half of this year. HSBC is due to release its results today  and Standard Chartered Bank  tomorrow.
The two local banks, HSBC's subsidiary Hang Seng Bank and Bank of East Asia, are expected to report a slower growth in net profits.
However, Mr Ho expects the operating profits of Hong Kong banks to meet expectations.
'The profits of many Hong Kong banks will continue to be affected by the subprime mortgage problems even though they have only some exposure,' Mr Ho said.
'However, I don't think this is a major issue for the banks. This is not going to threaten the capital ratio.'
Paul Lee, an analyst at Taifook Research, expects HSBC to report a 15 per cent year-on-year fall in net profits to US$9.37 billion.
HSBC's US consumer finance subsidiary, HSBC Finance Corporation, is a significant player in the US subprime mortgage market. Its impairment losses have been on a rising trend since 2006.
Provisions made for bad debts last year went up to US$11.9 billion,  which came from North America. Its pre-tax profit fell 98 per cent to US$91 million  in the region. The bank also made a US$2.13 billion  write-down, partly related to subprime.
Richard Barnes, a director at Standard & Poor's,  expects these impairment losses to remain high this year but believes the bank's business in Asia will perform.
'In China, for example, HSBC earned US$181 million from its own businesses last year and US$1.1 billion,  excluding one-off gains, from its associates, primarily its stakes in Bank of Communications and Ping An Insurance (Group),' Mr Barnes said.
Analysts expect Bank of East Asia to make further provisions due to its exposure to collateralised debt obligations (CDOs).
At least 30 per cent is needed to cover its losses in CDOs, according to Core Pacific-Yamaichi International analyst Lee Yuk-kei.
The bank made a combined provision of HK$1.35 billion  on certain securities affected by the subprime mortgage crisis.  A total of HK$1.15 billion  was written down, of which HK$1.09 billion  was for US$700 million in CDOs. It also took an impairment charge on notes issued by structured investment vehicles of about HK$270 million,  more than half of its HK$500 million  total.
Net profits of both Bank of East Asia and Hang Seng Bank for this year might be less than last year, and the range of profits will decrease by 3 to 10 per cent, according to analysts. While Hang Seng Bank reported record earnings of HK$18.24 billion  for last year, Bank of East Asia reported HK$4.14 billion.
Although Hang Seng Bank does not have any exposure to subprime mortgages, analysts predict net profits may be hampered by the slower growth in lending on the mainland, where Hong Kong banks have been growing their lending businesses.
Last year, the mainland market contributed 6.5 per cent of Hang Seng Bank's pre-tax profit, up from 6.1 per cent in 2006.
Net profit from Bank of East Asia operations on the mainland surged 73 per cent to HK$926 million  last year, which was about 22.4 per cent of its total earnings.
Real gross domestic product growth is forecast to be 10 per cent in China. Domestic loan growth is about 14 per cent every year compared with Hong Kong's 10 per cent. Mr Ho said: 'Even though the profits of these banks are still coming from Hong Kong, businesses in China will become key if Hong Kong banks want to sustain profits on long term growth.'
Pandora Leung, an analyst at KGI securities,  expects earnings of Standard Chartered Bank's wholesale banking business to increase 30 per cent.
However, the bank's overall growth in consumer banking and in South Asia will slow.
Nick Hill, director, western European financial institutions ratings at Standard & Poor's,  said that Standard Chartered Bank's exposure to subprime mortgage should not affect the bank's long-term growth.
'There is US$673 million of CDO exposure which includes some indirect exposure to US subprime via some high-grade and mezzanine CDOs, which have been fully written off.
'In short, we do not consider these significantly risky amounts for a bank of Standard Chartered Bank's size,' Mr Hill said.



Subprime crisis to hit Hong Kong banks