Lenders shift focus amid muted mortgage market
Property cooling measures force banks to look for other ways to boost business
Hong Kong banks' mortgage lending appears prone to shrinkage after a significant fall in property transactions since the government rolled out measures to cool the market.
DBS Bank's mortgage portfolio shrank 7.1 per cent in the first half of the year, while Bank of East Asia, Wing Lung Bank, ICBC (Asia) and China Citic Bank International each saw mortgage lending edge up by less than a percentage point, according to their interim reports.
Bankers predict very slow mortgage business growth in the second half.
Outstanding mortgage loan portfolios run off at a rate of 5 to 6 per cent a year, according to market watchers. So banks have to grow the book by at least that rate each year to maintain portfolio size. But average monthly residential transactions have slumped 38 per cent in the first 11 months of this year.
As it is hard to grow the mortgage book in a depressed property market, some banks are forced to find other ways to provide loans.
"Banks will focus on commercial lending and personal lending according to the needs of customers," said Nancy Chan Ha-fong, a deputy chief executive of Bank of Communications' Hong Kong branch. "Mortgages are just part of the lending business."
The property-backed mortgage is widely considered a safe asset for banks. The Hong Kong Monetary Authority sets the risk weighting on mortgage business at a minimum of 15 per cent of capital, meaning that banks have to hold at least HK$15 for every HK$100 of mortgage lending.
Other kinds of lending, including corporate loans, commercial loans and personal loans, have higher risk weightings, reflecting the higher risks associated with them, but also come with higher returns in the form of interest income.
Some market watchers have warned that credit quality could easily sour as banks expand lending to other sectors, such as small and medium-sized enterprises, instead of residential mortgages.
While bad loan levels remain low in the city, more banks are becoming aggressive players in the personal loan business, offering loans of up to HK$1 million or more to individuals without any collateral.
Wing Lung Bank, a subsidiary of China Merchants Bank, has raised its cap on the maximum size of personal loans and lengthened repayment periods in its effort to increase its personal loans business.
However, higher returns mean higher risk, with bankers saying that a portfolio with a growing portion of unsecured lending is vulnerable once interest rates start to pick up. Banks do not give a breakdown of unsecured personal loans and SME loans in their financial reports.
Bankers said only a small portion of SME loans were backed by assets such as property and deposits.
Some mainland Chinese and South Asian banks have developed improved risk-assessment models that allow them to increase SME loans without worrying about worsening credit quality, according to Kenny Lam, McKinsey's head of Asia retail banking and private banking practice.
Lam said that knowing a firm's management, ranking among peers and industry trends were far more important than financial reports when assessing an SME.
"In applying ratings to different aspects of the firm, one can tell whether the firm has the ability to return the loan," he said.