HK banking sector profits grow 8.7pc in 2016 but officials still advise caution

Hong Kong Monetary Authority says sector remains resilient, but adds ‘in 2017, the macro environment will be more challenging’

PUBLISHED : Thursday, 26 January, 2017, 7:51pm
UPDATED : Thursday, 26 January, 2017, 10:56pm

Hong Kong’s banking industry grew its overall profits last year, according to official figures, though the regulator warned of a more challenging environment for the rest of this year.

The Hong Kong Monetary Authority (HKMA), the city’s de facto central bank, said that pre-tax operating profits of banks in Hong Kong grew by 8.7 per cent last year compared with 2015, turning around 2014’s 3.6 per cent decline in profits.

Arthur Yuen Kwok-Hang, the HKMA’s deputy chief executive, said the progress last year was on the back of rising loan growth within Hong Kong, in mainland China, and further afield.

Total loans extended by Hong Kong banks increased by 6.5 per cent compared to 2015, with mortgage lending increasing by 4.2 per cent. Net interest margins were unchanged at 1.32 per cent.

Yuen said that Hong Kong’s banking sector “remained resilient”, but despite the ostensibly impressive figures, he advised caution in the face of a rising interest rate environment in the US.

“In 2017, the macro environment will be more challenging,” Yuen told a media briefing at the HKMA offices, adding the regulator’s first priority for 2017 would be liquidity, not credit risk as it had been in 2016.

After the global financial crisis, 100 billion dollars of hot money flowed into Hong Kong. When it flows out, there will be pressure on liquidity
Arthur Yuen Kwok-Hang, deputy chief executive, HKMA

“It is hard for us to forecast the level of liquidity in the system as there are many things that might trigger outflows, but the most significant is the difference in interest rates between the US and Hong Kong,” Yuen said.

The US federal reserve raised interest rates in December 2016, and indicated that there could be three further rises this year. Some economists predict just two, but as Yuen noted, “the direction is clear”.

As the Hong Kong dollar is pegged to the US dollar, the authority is forced to follow any interest rate moves by the Fed. But while many US lenders adjusted their prime rate after the Fed’s move, Hong Kong banks did not.

“After the global financial crisis, 100 billion dollars of hot money flowed into Hong Kong. When it flows out, there will be pressure on liquidity,” Yuen said.

At present Hong Kong’s aggregate balance stands at approximately HK$260 billion – an ample level but still lower than its peak of over HK$400 billion before the Fed raised its rates.

One month HIBOR (the Hong Kong Interbank Offered Rate, or the rate at which banks lend to each other), currently stands at 0.77 per cent.

Stricter stress tests will be carried out on Hong Kong’s banks to check they can cope with tightened liquidity, Yuen said, advising banks to be cautious when extending loans and approving mortgages.

Yuen also referred to the complaints often raised by small businesses and business advocacy groups about the difficulties when opening bank accounts in Hong Kong.

Banks often cite anti-money laundering (AML) measures as the main reason for the city’s notorious difficulties in opening bank accounts, but Yuen said that when it came to making it easy for clients to open bank accounts and abiding by AML regulations, “there is no conflict between the two”.

Complaints about opening accounts accounted for the largest percentage of complains the HKMA recieved in 2016, but were nonetheless just 13 per cent of the total of 1,745 the regulator received.

Meena Datwani, the HKMA’s executive director for enforcement and AML, said the figure was three percentage points lower than last year.

She also noted that the trend had been away from complaints regarding bank account opening, and more towards those involving the freezing of accounts, which suggested the city’s banks were allowing accounts to open, but were adopting a “risk-based approach” when monitoring them for areas of concern.