Hong Kong banks have survived the Asian economic crisis awash with cash and anxious to get back to the business of lending money. But until big borrowers begin lining up for loans once again, investors are unlikely to reverse the selling tide which has swept bank shares down by 20 per cent since the beginning of the year. That is the message which emerged during the just ended bank profit reporting season. The reports still bear the scars of the sudden and sharp economic recession which swept through the region after the Thai baht's devaluation in July 1997 - chiefly in the form of lower, but enduring, loan write-offs and bad-debt charges. The legacy of the crisis was also evident in an understandably risk-shy attitude by lenders, and poor loan demand from debt-wary companies. Clearly, it is taking time for bankers and their customers to recover the confidence lost during the crisis. The bonus was that half the banks which unveiled last year's results during the past few weeks reported shrinking loan books. Another two reported almost unchanged customer advances. The 7.8 per cent loans growth reported by HSBC Holdings, when whittled back to mainly Hong Kong operations, turned into a 6.8 per cent decline in the books of its 62-per cent-owned subsidiary Hong Kong & Shanghai Banking Corp (HSBC). Worst-hit was HKCB Bank Holding, which saw customer advances shrinking by a whopping 21.5 per cent. More than half the fall probably came from loans written-off during the year. Bank deposits, on the other hand, grew quite strongly during a period in which cash was king. Benefiting from its reassuring size and an unrivalled brand superiority, HSBC saw a flight to quality lifting its deposit base by 16.5 per cent during the year. But with cash pouring over their counters and no one around to borrow money, banks all reported declining loan/deposit ratios - down to 50.4 per cent in the case of HSBC. HKCB saw its ratio plunge from 70.5 per cent to 54.10 per cent. Liquidity ratios in the circumstances, were high by historical standards and the cash-flush banks went to war with one another to lend their money on private mortgages. Were it not for a big rise in charges for bad and doubtful debts, the runaway winner in last year's performance stakes would have been Dah Sing Financial Holdings, parent of Dah Sing Bank and DAH Private Bank. A clear leader in profit growth, with bottom line earnings up 132.7 per cent to $586.5 million, Dah Sing was also a leader in the core business of making new loans despite the lingering anxiety from the 1998 experience. Dah Sing was also in the top three for deposit and total asset growth, raking in 13 per cent more deposits to $32.6 billion, and reporting a 10.9 per cent growth in total assets to $44.4 billion. In a reporting season characterised by enormous attention to developing Internet-banking, Dah Sing also stole the limelight by revealing it planned to fold its private bank into the operations of its commercial bank, and use the surplus licence to set up a stand-alone and separately licensed 'e-bank'. That proved a fortuitous move given the latest guidelines on virtual banking issued by the Hong Kong Monetary Authority now circulating for comment, and which appear tailor-made for the Dah Sing initiative. But it was bad-loan charges - up 59.3 per cent to $406.54 million which threw the brakes on an even faster recovery for Dah Sing. That performance put Dah Sing in the bottom half of the charges table, where Union Bank - the only bank to report a loss for last year - stunned the market by following up on a $328.8 million charge taken in 1998, with another $738.21 million bad-debt charge in last year's accounts. That was a 124.5 per cent increase in bad-debt provisioning for Union Bank, which lifted provisioning as a percentage of total loans to an industry-worst of 6.2 per cent, and went a long way to account for its $545.01 million loss. The biggest improvement in bad-debt charges came from HKCB, which elected to take a huge $796.6 million charge in its 1998 results and show a loss of $646.4 million as a result. Savvy investors may now be asking whether these high levels of provisioning may have been overdone, and whether write-backs in the current-year accounts might not lift profit performance for this year. Several bank managers addressed these prospects in commentaries on their results, and if bank share prices fail to respond to improving economic indicators, a brighter economic outlook might present buying opportunities. But for the moment, the market is not interested in backing a recovery for bank shares. This is partly because economic fundamentals are presently less important in the equation than market sentiment, and the bashing of bank shares has become a global phenomenon. 'It is the other side of the big swing to technology stocks under way right now,' said one banking executive. That swing has arisen because of the market expectations of where future profit growth will be coming from - and clearly the stock market sees much stronger revenue growth opportunities in the technology sector, rather than the banking sector. Banks are seen as being vulnerable to threats from the technology sector arising from disintermediation from new entrants competing at very much lower cost. Adding to the woes of shareholders who have seen their bank shares tumbling, is the interest rate environment. Historically, whenever interest rates are moving up, bank shares tend to move down, since the correct perception of the market is that rising interest rates will eat into bank earnings. All things considered, therefore, the bank profit results just unveiled failed to persuade the market that a strong recovery was under way in the sector.