REVERSING the trend of consistent positive profit growth for the territory's banks, Standard Chartered Bank's Hong Kong operation broke the spell yesterday by posting a disappointing 12 per cent drop in profit, to HK$1.24 billion. Even stripping off the large exceptional item of $187 million last year which arose from the sale of properties in Asia, the trading profit still fell slightly by one per cent from $1.23 million to $1.22 million. Its contribution to the group's total pre-tax profit dropped to 46 per cent, compared with drops of 71 per cent in the first half and 48.5 per cent in the second half of last year. In fact, the Hong Kong result was seen against the backdrop of a much improved banking group which recorded a 39 per cent growth in pre-tax profit, jumping from GBP170 million (about HK$2.02 billion) by end of June last year to GBP237 million this year. The relatively lacklustre performance of Standard Chartered, Hong Kong, which is running more than 110 branches, can be attributed to a number of factors, namely a squeeze in interest margins, slack initial public offering (IPO) activities and restrained growth in the property market. ''The spread between our prime rate and the rate offered on our savings accounts narrowed by 0.25 percentage points per annum in the first half of the year,'' said Ian Wilson, general manager of Hong Kong and China. Another indicator, the net interest margin, as measured by the interest income against the total assets, has substantially contracted from 1.53 per cent in June last year to 1.29 per cent this year. As a result, the net interest income fell by six per cent from $2 billion by June last year to $1.88 billion this year. This shortfall was offset by other income and a slight increase in dealing profits. Mr Wilson also pointed out the unfavourable financial market conditions, which resulted in a substantial fall in IPOs, in stark contrast with the market frenzy last year. Measures had been taken to improve the bank's credit and the liquidity position, which included restraining the growth in its direct exposure to the property market. ''We have taken a careful look at commercial property and have become more selective in those facilities, judging on a case-by-case approach,'' Mr Wilson said, adding that residential mortgage growth was also arrested. The move to cap property exposure was partly propelled by the need for prudent management of the balance sheet and partly by the advice given by the Hong Kong Monetary Authority. Efforts will be re-directed towards regional corporate business and international trade finance. The bank confirmed that it would launch its first deal on mortgage-backed securities in the fourth quarter. Its total assets grew by 12 per cent if the distortion caused by lending to new share subscription was removed. Yet the growth was lower than the 10 per cent increase in risk weighted assets.