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Cut-throat competition in mortgage lending and slimming margins will force a number of banks to sell their home-lending portfolios to the Hong Kong Mortgage Corporation, experts warn.

According to available figures, the number of banks selling their home-lending portfolios to the HKMC - the leading backer of mortgages in Hong Kong - rose nearly four-fold this year, and the HKMC expects to acquire more next year because of the slump in the property market.

So far this year the HKMC has taken over HK$5.8 billion of mortgage portfolios from banks, a 286.7 per cent jump compared to just HK$1.5 billion for the whole of last year.

HKMC chief executive Peter Pang Sing-tong told the Sunday Morning Post : 'I can see more banks will be selling their mortgage portfolios to us.

'I think what they want to do is to reduce the concentration risk. They may also want a strategic change by switching to other more profitable businesses.'

Set up in 1997 to encourage home ownership, one of HKMC's roles is to buy home-loan businesses in good condition from banks so as to allow them to divert their investment.

Insurance Commissioner Benjamin Tang Kwok-bun said he believed the HKMC had sufficient assets to cover any possible liability even if more banks were to hand over their home-loans business.

'It has the ability to take on more cases,' Mr Tang said.

Banking analysts said the price war on interest rates had driven marginal players such as foreign and small local banks out of what used to be a highly lucrative business of home lending as the property market had shrunk drastically since the onset of the Asian financial crisis.

Earlier last week, Citibank, one of the world's largest lenders, said it was considering exiting the local mortgage business by selling its mortgage portfolio to the HKMC.

The United States-based bank said if the sale went ahead, it would deploy the proceeds in developing its wealth-management business.

CLSA Emerging Markets analyst Andrew Reynolds said: 'It's very difficult for non-deposit-taking institutions to survive with the interest rate so low. They are bordering on non-profit.'

Mr Reynolds said although Citibank had refrained from saying that it would withdraw from the business completely, it had hinted that the bank would not be active in pursuing clients for mortgage business.

'They said they would be more selective of their clients and would grant only the prime rate. You know what they mean,' he said.

Since the market was already very limited, Mr Reynolds believed the impact on other banks would be minimal, even if more foreign banks were to sideline their mortgage business.

Allan Chua, a banking analyst at HSBC Securities, said: 'I don't think the foreign banks will leave the business altogether. They may not pursue business actively at this moment but will come back if the market picks up.'

Professor Ho Lok-sang, director of Lingnan University's Centre for Public Policy Studies, said: 'The big players - HSBC, Standard Chartered, Hang Seng Bank, Bank of China and Bank of East Asia - had made it difficult for the smaller ones to squeeze a share in the present market.

'But I don't think all of them are giving up. They are just leaving it aside for the while.'

A spokesman for Fortis Bank insisted mortgage was one of the bank's business focuses and that it was satisfied with the performance even though the price war had reduced profit margins.

Analysts pointed out that leading players in the mortgage business had a cheap source of bank deposits, as interest rates were almost zero, and were actively pursuing clients by offering attractive mortgages, well-below prime in most cases. Thus their margins were already wafer thin.

Foreign and smaller banks did not have such resources and hence had to go to the interbank market to borrow funds, which made the business unprofitable.

According to the Hong Kong Monetary Authority, about 80 per cent of home loans were made at 2.25 per cent or more below the prime rate as of October this year.

Standard Chartered and HSBC had the biggest market share, accounting for 16.9 per cent and 16.3 per cent of a total 56,827 cases, according to figures provided by Centaline Property Agency.

Some banks were resorting to niche markets to survive in the home-lending business.

Liu Chong Hing Bank is trying to survive in its niche by covering village houses and houses aged 40 years and over.

Brian Cheung Nam-chung, Liu Chong Hing's senior manager, said: 'Mortgage is the lifeblood of local banks. We can only strive to survive in our small niche.

'International banks have a huge area to cover, Hong Kong is just a small market. They can afford to put it aside for a while.'

To attract more clients, banks are offering an array of incentives, ranging from cash rebates and legal-fee waivers to one-stop services for property transaction procedures.

Bank of East Asia, for example, is offering a Free of Premium Mortgage Plan for home buyers under the Mortgage Insurance Programme launched by the HKMC recently, meaning the premium is fully borne by the bank.



Banks lighten mortgage load