Clues to some fine-tuning of lending strategy which is expected from Hong Kong banks in the second half may be found in just-released first-half profit results. A feature of the reporting season has been the asset reallocation done by banks in search of higher yields from barely changed aggregate loan books. Latest Hong Kong Monetary Authority data shows that in May, loans and advances contracted by 1.1 per cent. Of the total, domestic loans rose slightly by 0.3 per cent, following a decline of 0.3 per cent in April, while loans for use outside Hong Kong registered a larger decline of 4.7 per cent. That experience was captured in the flat or barely improved lending totals reported by several banks, and it underlined the observation made by bankers that Hong Kong is experiencing a credit-less recovery as gun-shy bankers and borrowers struggle to put the trauma of the Asian financial crisis behind them. Ranging from a barely noticeable shift in some lending strategies, to more daring decisions in others, banks have responded to the poor demand for loans by a variety of means, one of which is trying to lift net interest margins. One strategy was to quit the low yielding home mortgage market and increase trade finance - and with a new attitude towards the security offered by the Export Credit Insurance Corp (ECIC), this could gain momentum in the second half. HKCB Bank Holdings reported the biggest rise in pre-provisioning operating profit, which unveiled core earnings up 192 per cent at HK$396.01 million. Helping those profits higher - on a customer loanbook that was only narrowly ahead at HK$14.11 billion (up 4.4 per cent) - was a more judicious mix of higher-yielding loans. One target of this reallocation was trade finance, which was up 3.7 per cent at HK$1.18 billion. Hang Seng Bank, which aggressively grew its mortgage portfolio - up from HK$73.85 billion to HK$76.38 billion, also lent more heavily on trade finance - up from HK$8.79 billion to HK$9.79 billion. However, Dah Sing Bank allowed its mortgage portfolio to shrink 4.2 per cent from HK$7.48 billion to HK$7.17 billion, while it lifted trade finance from HK$2.17 billion to HK$2.21 billion. That helped raise Dah Sing's net interest margin from 3.45 per cent to 3.75 per cent - one of the highest for the banking sector, and contributed to a pre-provisioning operating profit of HK$574.9 million - up 26.3 per cent. From May this year, banks began relenting on a long-standing policy of insisting on collateral security for trade finance - in addition to the insurance policies issued by the ECIC and assigned to the banks as security against trade loans. The first two banks to accept ECIC insurance policies as sufficient security on which to advance lines of credit were Wing Lung and Dao Heng, said commissioner Thomas Yiu. Since then most banks had followed suit, said Mr Yiu. 'It is encouraging to see the rapid increase in popularity of this arrangement,' he said. The betting is now on that bankers will switch more resources to backing Hong Kong exporters, who, after all, are in the vanguard of the SAR's economic recovery. First-quarter growth in gross domestic product of 14 per cent was driven mainly by a 20.7 per cent increase in merchandise exports, along with a 16.4 per cent increase in service exports.