HKMA steps in to stop rate war
Hong Kong's banking watchdog has acted to head off a damaging mortgage price war by setting guidance floors on mortgage rates, and warning lenders of default risks in a property market correction.
The move came after banking giant HSBC last month launched the city's lowest mortgage rate - a 0.65 percentage point premium to the one-month Hong Kong interbank offered rate (Hibor).
HSBC's offer, the lowest in 20 years, was soon matched by its rivals.
The Hong Kong Monetary Authority fears that the intense price competition in mortgages is not sustainable and puts smaller banks at risk in the event property prices slide and global interest rates rise.
With Hibor at about 0.08 per cent yesterday, HSBC's effective offered rate was 0.73 per cent.
It was the first time HSBC had launched a Hibor-linked mortgage product and came after it lost market share to other banks offering such products.
The authority said it had held meetings with banks about their lending practices and was concerned about 'whether banks' pricing decisions ignored the potential adverse impact of future increases in funding costs or delinquency levels on their financial soundness'.
It told banks their pricing framework needs to include a 'reference level' that takes into account their capital, credit costs, expenses, incentives for customers and delinquency assumptions.
ICBC (Asia) deputy general manager Stanley Wong Yuen-fai told Bloomberg the authority had set the level at 0.7 percentage point above the one-month Hibor and 3.1 percentage points below the banks' prime mortgage rate.
The authority's spokesman would not comment on the reference levels but said 'if a bank's existing mortgage rate is lower than what we consider to be sustainable, we will discuss with the bank to see how it can justify its rate on risk management grounds and ensure the sustainability of its mortgage rates through an economic cycle'.
While the authority does not impose interest rates on banks, it has the power to require banks to rectify lending practices it deems may endanger the banking system.
Fuelled by ultra-low interest rates and a flood of liquidity from global economic stimulus measures, Hong Kong mass-market property prices rose 30 per cent last year while those of luxury homes surged 40 per cent.
Speaking on the sidelines of the China People's Political Consultative Conference in Beijing, Hongkong and Shanghai Banking Corp chairman Vincent Cheng Hoi-chuen denied that the lender was leading the price war.
He said even without floors on rates, mortgage lending would not spin out of control, given banks exist to make profits, and that local mortgage delinquencies were low even during the Asian financial crisis.
But the HKMA said banks should avoid placing 'undue reliance' on historical data when doing their risk management.
In particular, it warned that unlike the 1997-98 Asian financial crisis, when declining interest rates reduced default risks, this 'might not repeat itself when the next decline in the property market takes place'.
Nomura Securities analyst Grace Wu said as the suggested floor prices were not far off the most aggressive offers in the market, they would not have a big impact on mortgage rates.
But they will favour large banks over small ones as the big lenders' funding cost is close to zero, while the small players have to borrow from the interbank market to finance their loans.
Smaller banks will have a hard time justifying further aggressive pricing moves to the authority, Core Pacific-Yamaichi Securities analyst Lee Yuk-kei said.
Limiting the cut
Reference level set at 0.7 percentage point above Hibor, 3.1 below prime
The Hong Kong interbank borrowing rate yesterday was: 0.08%
effectively placing HSBC's offered mortgage rate at: 0.73%
Hong Kong's mass-market property prices rose last year by: 30%