Union Bank sees first quarter net interest margins squeezed

Union Bank of Hong Kong saw its net interest margin for the first quarter significantly trimmed by about 80 basis points to 2.34 per cent from last year's average of 3.14 per cent, mainly driven by the volatility in money market rates in January.

Managing director and chief executive David Yau Man-tak described the squeeze in margin as 'acceptable' given the failures of financial institutions including Peregrine Investments and CA Pacific in the first two months.

Mr Yau said the bank had seen a significant pick-up in margins from March to April.

'We should expect a remarkable improvement from the second quarter onwards as it takes time for the impact of easing interbank rates to reflect in our funding cost structure.' The 22-branch bank - 60 per cent owned by the China Merchants Group - an entity controlled by the mainland's Communications Ministry, was the least affected among listed banks in Hong Kong in the wake of last year's financial crisis.

Its net interest margin only dropped eight basis points - from 3.22 per cent in 1996 to 3.14 per cent - compared with the average of a 25 basis-point squeeze reported by other listed banks in Hong Kong.

Mr Yau dismissed claims that the bank might have covered up the impact of interest rate volatility on its margins, saying that its 'billions of dollars' of net lending to the local money market had earned nice returns.