Bank of China (HK) set to continue loan war in second half as competitors turn conservative

BOCHK underwrites 60 per cent of all new loans in the city, with analysts saying growth could even accelerate based on its strong balance sheet

PUBLISHED : Sunday, 04 September, 2016, 6:06pm
UPDATED : Sunday, 04 September, 2016, 6:07pm

Hong Kong’s loan market is set to see the dominance of Bank of China (Hong Kong) expand even more in the second half of the year, with BOCHK management taking advantage of competitors turning conservative in their credit assessments in the wake of heavy losses.

Regulatory data shows that in the eight months to the end of August Hong Kong’s loan market has been largely flat, growing at a pace of just 2.2 per cent year on year. However, against the tide of negative growth in the industry and even shrinking balance sheets at its peer banks, BOCHK’s said its new loans grew at a 11.1 per cent clip in the eight months to end of August to HK$99 billion, accounting for 60 per cent of the total in Hong Kong. The remainder of Hong Kong’s lenders lent out HK$66 billion in the period.

However, the loans growth came at a price, with BOCHK’s first half core net profit dropping 2.3 per cent year on year to HK$11.8 billion, when excluding its one-off HK$30 billion gain from the sale of Nanyang Commercial Bank to China Cinda Asset Management.

At the bank’s latest results briefing on August 30, deputy chief executive Lin Jingzhen said the lender was “confident [it could] keep up with double-digit growth”.

“We feel the Chinese economy is stabilising [and] global economies are on a path to revival... Hong Kong’s economy could be chequered [but] there is hope for Hong Kong in the second half,” Lin said.

He said the bank will focus on loan growth in three key areas: mainland corporates going global; local industries seeking to internationalise, especially in the Southeast Asian market; and Southeast Asian related loans, which Lin thinks have potential for up to HK$30 billion of business.

BOCHK said so far this year it has completed 39 syndicated loan transactions worth more than HK$10 billion, far outpacing competitors.

In the local mortgage segment of the bank’s loan business, where pricing data is more transparent and disclosed to the public, BOCHK’s current best offer is the Hong Kong interbank (Hibor) rate plus 1.4 per cent, representing the lowest pricing in Hong Kong’s mortgage market.

Spreads on mortgages are getting very thin – it’s affecting the entire industry
Edmond Law, UOB Kay Hian

This low price strategy, when tied to the revelation that it has taken the bulk of the local loan market, is raising some eyebrows, although some analysts believe that with the industry’s interest spread set to worsen further in the second half, it gives BOCHK all the more reason to bolster itself with scale.

Edmond Law, research director for financials at UOB Kay Hian, believes that with its big bank status giving it a funding advantage, BOCHK has room to grow its scale even as it continues to undercut the market.

“Considering BOCHK’s cost of liabilities is at 0.8 per cent, so long as loans are priced above that the bank will make money. I think for the whole year, the bank’s loan growth can go up to 15 per cent,” said Law. “Spreads on mortgages are getting very thin – it’s affecting the entire industry.”

Dominic Chan, executive director at BNP Paribas, said that with weakening loan growth in the economy, banks will want to grow their mortgage business. “Compromises in pricing are necessary. As a big bank with funding advantage, [BOCHK] is still making a nice spread,” he said.

“In 2010, prices were Hibor plus 90bps. Now it’s Hibor plus 140bps... It’s hard to say how much further down we can see on loan pricing.”

Chan believes other banks in the industry are being punished now for having participated heavily in yuan arbitrage-related lending – a business that BOCHK did not participate in – but the currency’s depreciation since August 2015 has forced many banks to deleverage their balance sheets.

“Many banks were making 20 to 30 per cent loan growth to compensate for thinning net interest margins in the past two to three years. Their ups and downs now are more dramatic.”

Chan said the full-year industry loan growth rate will be in low single digits but BOCHK’s market share could still be maintained at its current level of 60 per cent.

“From what we can see, BOCHK has been expanding its lending to first and second-tier corporates in Hong Kong. Historically, it focused on SOEs,” said Chan.

With BOCHK’s Belt and Road policy lending push and acquiring its parent’s Asean assets, Chan forecasts it will maintain loan growth of 10 to 15 per cent for the full year, contrary to the ongoing weakness in the rest of the market.

BOCHK’s performance so far has defied the trend towards shrinking balance sheets that is threatening the region’s access to bank loan facilities as banks hurry to meet Basel III lending standards.

No bank ought to be immune - not even Chinese ones – said Mark Austen, chief executive of the Asia Securities Industry & Financial Markets Association, an industry group representing big banks in the capital markets industry.