THE full impact of interest rate deregulation on bank profitability has yet to filter through to the industry, deputy chief executive (banking) of the Hong Kong Monetary Authority David Carse says. Despite predictions that deregulation of interest rates on time deposits would squeeze net interest margins, raise interest expenses and ultimately affect profits, the latest round of 1995 results pointed to a different scenario. Instead, net interest margins at almost all large retail banks widened in 1995. The exceptions were Wing Lung Bank and Standard Chartered Bank. Overall, banks posted far better results than in 1994, which had been considered their best performance in this economic cycle. 'Banks have not been tested yet on interest rate deregulation.' Mr Carse said. He said the sluggish demand for loans in the first half of 1995 had dampened enthusiasm to chase deposits, when banks instead sought lending opportunities. He said this was in sharp contrast to the last quarter of 1994. 'During that time, banks paid one-to-two-per-cent above HIBOR [Hong Kong Inter-bank Offered Rate] to get deposits,' Mr Carse said. Mr Carse said deregulation had helped heighten awareness of cost control; as a result there was an across-the-board cut in cost-to-income ratios for nearly all banks in 1995. The exception was Bank of East Asia (BEA), whose higher cost was related to relocation of office buildings. He said judging from the rise in loan-to-deposit ratios, banks had been willing to use more deposits for lending to boost income. 'The good results were related to banks having improved their asset and liability management,' Mr Carse said. He said the last stage of deregulation, freeing up the cap on 24-hour or call deposits, would be destabilising to the sector. The government decided to halt the deregulation last year after time deposits for seven days or more had been relaxed. Hang Seng Bank chief executive Alexander Au said despite a high volume of retail deposits, the bank came out of the deregulation unscathed. 'Because the deregulation did not go all the way to the call deposit, we are not too worried. Otherwise it would be just like deregulating savings and current deposits,' he said. Mr Au said Hang Seng's wider net interest margin was due to a number of factors. The bank made substantial interest on its shareholders' funds, benefiting from the high level of interest rates. 'We improved our loan-to-deposit ratio and were involved in higher yield lending,' Mr Au said. The bank's net interest margin increased from 2.38 per cent to 2.8 per cent. Nomura Securities banking analyst Robin Fox said the better-than-expected result for the bigger banks was because of their tight cost control and minimal increase in loan provisioning. 'Loan quality was pretty high,' he said. Lower demand for loans and lower deposit rates in the second half of 1995 helped widen the interest margin. Mr Carse said that loan quality had not deteriorated as seriously as he first thought.