Latest loan data shows no let-up for SAR banks. Flush with deposits they are struggling to lend and face the prospect of further declines in their lending margins this month. On the cards for December 11, analysts believe, is a further 25- to 50-basis-point cut in United States interest rates, which will spill over into a further fall in domestic lending rates, at present at a best rate of 5.25 per cent. However, because savings rates are already at historic lows of just 0.25 per cent and banks have expressed reluctance to see zero rates, any further falls in rates will put an additional squeeze on the margin between banks' cost of funds and the price at which they lend those funds. Hong Kong Monetary Authority data released yesterday show that total loans for use in Hong Kong declined to HK$1.88 trillion in October - down 1.1 per cent on the previous month and 4.9 per cent on the same month last year. That follows on flat outcome recorded in the September data on loans for use in Hong Kong, which was unchanged on the previous month's HK$1.9 trillion, but down 4.7 per cent on a yearly basis. Capturing the sharp retreat in export activity as a result of the gathering global recession, loans to finance visible trade were down 3.6 per cent on the month and 15.1 per cent on a yearly basis; while loans to finance merchandise trade not passing through Hong Kong were down 0.8 per cent on the month, but 19.4 per cent on a yearly basis. Loans for use outside Hong Kong were down 2.1 per cent on the month at HK$334.09 billion, but down 19.4 per cent on the same month last year. Also released yesterday, the quarterly bulletin from the HKMA showed that although bank costs were rising, net interest margins were falling, leading to a decline in profitability. That does not augur well for this year's profit reporting season, which will get under way in March next year. The HKMA said a squeeze on lending margins was only partly offset by a rise in income from fees and commissions. 'Consequently the cost-income ratio rose to 39.4 per cent in the first nine months of the year from 36 per cent in the same period last year,' it said. For the first three quarters, the year-on-year net interest margin fell to 2.15 per cent from 2.37 per cent for the same period last year. That squeeze on lending margins is a result of a combination of factors, including the aggressive campaign to capture business in the sluggish property market - which has carved mortgage rates close to the bone; as well as the sharp retreat in domestic interest rates following the year-long campaign by the Federal Reserve to help the US economy with a record 10 rate cuts. The link between the US dollar and the Hong Kong dollar means that local interest rates closely track movements in US rates. Earlier last week, home loan data showed demand for mortgages fell for the second consecutive month in October - by 13.4 per cent to HK$7 billion. That weak performance followed a 31.8 per cent fall in gross new loans made in September and extended a sharp reverse in positive sentiment among home-buyers. The percentage of loans made at more than 2.25 per cent below prime rate as the mortgage price war gathered pace rose sharply from 62.4 per cent in September to 65.1 per cent. In October last year, just 5.5 per cent of new loans were made at more than 2.25 per cent below prime lending rates.