Competition for deposits to weigh on BOCHK
Profit rises marginally at the bank amid intense competition from smaller lenders who offer higher interest rates on deposits
Intensified competition for deposits is likely to cast a cloud over returns on lending at BOC Hong Kong (Holdings) - BOCHK - for the rest of the year, the bank's chief executive said yesterday.
BOCHK, the Hong Kong subsidiary of Bank of China, saw its interim net profit edge up 0.08 per cent year on year in the first half of the year, saying the result had been affected by a decline in revaluation of property that had offset growth in net interest income and fee income.
The imminent tapering of quantitative easing by the US Federal Reserve also remains a concern for the local lenders. Banks are building up deposits to support future loan demands because of concerns that some hot money deposits may be diverted from the city. Many smaller lenders compete by offering higher interest rates on deposits, adding to pressure on banks with a strong deposit base.
BOCHK earned HK$11.2 billion in the first half of the year, slightly above the consensus forecast of HK$11.1 billion compiled by Bloomberg.
"The market competition for funds will add pressure to our net interest margin," chief executive He Guangbei told a news conference. Net interest margin, a key measure of lending profitability based on the spread between interest that banks earn on loans and what they pay on deposits, could be at risk when the cost of getting deposits rises.
He said he expected the lender would benefit when the benchmark interest rates for the US dollar and Hong Kong dollar increased, but it was hard to forecast when such increases would take place.
Its net interest margin widened to 1.67 per cent from 1.56 per cent in the second half of last year, attributed to an improved loan and deposit spread. Loan pricing on corporate lending was higher and the group exercised cautious control of deposit costs, the bank said. Customer loans grew 6.7 per cent while total deposits rose 2.9 per cent from the end of last year.
"Funding costs will likely pick up in the second half, and have a negative impact on all the banks," said a Hong Kong-based banking analyst who declined to be named.
He noted that BOCHK's operating performance was generally better than listed peers Hang Seng Bank and Bank of East Asia.
BOCHK's operating profit before impairment grew 10.4 per cent year on year while net interest income rose by 5.6 per cent and fee income jumped by 16.1 per cent.
After Singapore and Taiwan set up their own yuan-clearing banks, BOCHK, the sole yuan-clearing bank in the city, said it recorded a fall in yuan deposits from participating banks.
"The profitability on yuan-clearing services is quite low," He said, adding that BOCHK would establish more yuan loans, interbank lending and fund raising to create more sustainable income. The bank said it had witnessed continued expansion of the offshore yuan market with further policy relaxation.
Its bad-loan ratio remained unchanged from the end of last year at 0.26 per cent, but up from 0.1 per cent in the first half of last year. Asset provisions jumped to HK$371 million from HK$108 million.