Lenders will report flat earnings, with tighter competition for home loans and debt writeoffs still high Tough competition in the home loan market and persistently high consumer bad debt writeoffs are expected to see banks report flat earnings when they begin to unveil their interim results later this week. International Bank of Asia will begin the banking industry's interim reporting season on Thursday, followed by Bank of East Asia (BEA) the following day and HSBC and subsidiary Hang Seng Bank on August 4. 'In terms of net profit year-on-year, in the first half we are most likely going to see flat earnings,' said BNP Paribas Peregrine banking analyst Patrick Ho. Most analysts expect banks to report from between a 10 per cent fall to a 5 per cent rise in net profits for the first half compared with the same period last year. Hang Seng Bank, which was supported last year by a one-off HK$330 million release in general provisions, is widely expected to show one of the weakest performances. Core Pacific-Yamaichi banking analyst Bonnie Lai forecasts the HSBC subsidiary to post a 7 per cent year-on-year profit for the first half. Larger banks, in general, are forecast to report declining returns on the huge pools of deposits amid low demand for loans. During the first half of this year, money market rates - through which banks lend to one another - overshot a 0.25 percentage point interest rate cut by the US Federal Reserve. At one point, the benchmark three-month Hong Kong Interbank Offered Rate (Hibor) was down about 43 basis points from the beginning of the year. Combined with renewed competition between lenders on mortgages, most analysts expect net interest margins to contract further by at least five basis points. 'At the moment banks are positive on the long-term future and they want to seize [mortgage] market share,' Mr Ho said. 'On top of that, there's really no loan demand elsewhere.' However, some medium-sized lenders who finance their bank lendings through the interbank market - such as BEA and Citic Ka Wah Bank - should see their interest margins stabilise somewhat, according to investment bank Morgan Stanley. The spread between the prime lending and money market borrowing rates stands at 3.9 per cent, compared with an average of 3.2 per cent last year. Fixed-income securities, which helped prop up some banks' earnings last year, are likely to face re-pricing pressures as they near maturity. 'The move to fixed income has been one of the key factors sustaining bank profitability and margins over the past few years,' said Bank of China International head of financials Anthony Lok. 'With interest rates at historic lows, the sustainability of profits from treasury operations is questionable.' Consumer bad debt writeoffs are expected to remain high, with unemployment at record levels. 'We are probably arguing the difference of within one percentage point [in write-offs compared to last year] here,' Mr Lok said. He said Standard Chartered Bank and Dah Sing Bank, which had the heaviest exposure to consumer loans, would be hit hardest. While analysts say the dollar amounts of credit card writeoffs are falling thanks to thorough provisioning in previous quarters and tighter lending practices, card advances have also shrunk during the first half this year. This was compounded by the Sars outbreak, as residents chose to stay home. Credit card charge-offs rates are thus expected to remain flat year-on-year.