Competition expected to heat up with fuller disclosure rules
DESPITE little reaction to the initial dissolution of the interest rate agreement, bankers expect the competition to heat up by the end of the year as banks struggle to readjust their balance sheets for fuller disclosure.
The banking sector took a big stride on October 1 by removing the caps on time deposits with a maturity of more than one month.
However, the impact so far has been mild, with rates edging up 50 basis points to 75 basis points.
While the benefits to depositors have yet to be seen, the move has wiped out the uniformity of rates in the banking sector.
Banks now price their rates in accordance with their funding needs.
Not surprisingly, the shock created has been minimal because the deregulated deposits make up only four per cent of the agreement-governed deposit base.
The most noticeable effect of deregulation is that it has made swap deposits redundant.
The Hong Kong Association of Banks observed that the market received the rate increases comfortably with no price war yet detected.
Yet the resulting competition will serve to indicate what will happen when later stages of deregulation are implemented.
Bankers say that while every bank is still shuffling its position because of uncertainty on how far to push up rates, a pattern has emerged.
The bigger banks want to adopt a wait-and-see attitude, moving the rates up in line with swap rates, while a small group of medium-sized banks have grabbed the opportunity to gain some market share.
Although the new rule has not resulted in a price war, there are more aggressive banks, among which are some mainland banks and Liu Chong Hing Bank.
'This is not surprising because Chinese banks have been very aggressive in securing wholesale deposits before October 1,' said a Hongkong Bank spokesman.
'Other small banks will make use of this opportunity to attract depositors.' Meanwhile, the bigger players, with their much larger depositor base, are more cautious.
Hongkong Bank introduced a four-tiered structure to its time deposits, with rates edging up to a level comparable to its swap deposits.
It has also tightened eligibility for its time deposits from a minimum amount of $3,000 to $10,000.
'With the tiered structure, we can give higher rates to the type of deposit we want to attract,' the spokesman said.
Hang Seng Bank has made fewer changes. It simply gives swap rates to Hong Kong dollar deposits above $30,000, the minimum amount required for a swap deposit.
A smaller bank, Bank of America (Asia), said the bank would offer rates that closely matched interbank rates.
'I don't think the time deposit is an interest-rate sensitive category. So far, we haven't seen any migration of deposits from currents [current accounts] or savings to time deposits to get a higher rate,' said Samuel Tsien, executive vice-president of Bank of America.
However, some bankers fret that the competition will intensify as the end of the year approaches.
'We have seen a lot of customers trading one bank against another in search of higher rates,' said one executive from a medium-sized bank.
He expects to see heated competition later.
Banks are obliged to reveal more financial information in their profit and loss accounts and balance sheets in this year's accounts, under an agreement reached by the Hong Kong Monetary Authority, the stock exchange and the Securities and Futures Commission in August.
'Banks will be eager to shape up their balance sheets in anticipation of the disclosure,' said an executive from a medium-sized bank.
The challenge for bankers lies beyond a correct pricing of deposits, in a timely repricing of their assets to match the increase in funding costs.
Hongkong Bank said the deregulated rates would move more frequently than before, reflecting its new market-oriented approach.
This first phase of interest rate reforms has not caused many ripples in the sector, but bankers and the banking regulator are bracing for the subsequent phases.
By next year, interest rates on all deposits fixed for more than seven days will be freed.
Closely following this will be fixed deposits of more than 24 hours, the rate caps on which will be removed on April 1.
The final phase will see 24 hour call deposits deregulated.