Banking & Finance

Is banks’ deposits race the first sign of Hong Kong’s property bubble bursting?

Analysts suggest zero rates for smaller depositors could soon become a thing of the past and overall lending amounts could rise in June for the first time in 12 years

PUBLISHED : Tuesday, 22 May, 2018, 12:01pm
UPDATED : Tuesday, 22 May, 2018, 11:31pm

Many of Hong Kong’s largest banks have been in a race to promote fixed-time deposit schemes, themed around Mother’s Day with offers of higher interest rates to attract more savings – a clear sign that lenders are scrapping over new customers as more capital continues to flow out of the city.

While most small depositors still earn zero interest on savings accounts, banks are now offering larger depositors higher rates.

HSBC, Bank of China Hong Kong (BOC HK), Citi and many others have started offering rates as high as 2.7 per cent to lure deposits.

Some analysts now believe zero rates for smaller depositors could soon become a thing of the past, at least for the foreseeable future, and overall lending amounts could rise in June for the first time in 12 years.

The banks’ rates are intricately linked to Hong Kong’s property industry, where average home prices have continued rising non-stop every month for two years, making the city the world’s most expensive urban city to live in. Any rise in interest rates could spillover into mortgage payments, taking the wind out of the property market, analysts said.

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The weakening of the Hong Kong dollar, which recently dropped to its lowest level against the US dollar in 35 years, has led some HK$60 billion (US$7.64 billion) to flow out of Hong Kong for other markets, said Jasper Lo, chief investment strategies at Eddid Securities and Futures.

“The capital outflow has resulted in less money in the banking sector and hence led the Hibor (Hong Kong interbank offered rate) to increase to a record level in almost a decade,” he said. “When commercial banks find it too expensive to pay that level to get the money in the interbank market, it is natural for them to offer higher deposit rates to customers.”

The 3-month Hibor rose to 1.75 per cent on Friday while the 1-month Hibor was at almost 1 per cent.

Bank of China offers the highest deposit rate in the city. From May 9 to 18, a 12-month deposit of at least HK$50,000 could earn customers 2.7 per cent per annum. The bank’s spokesman said it had not decided if similar offers would be made to coincide with Father’s Day (June 17 in Hong Kong).

Bank of East Asia on Friday increased its 9-month Hong Kong dollar time deposit promotional offer to 2.1 per cent for new “SupremeGold” customers, with initial deposits starting at HK$100,000. That’s 72 basis points higher than three months ago, at 1.28 per cent, according to its website.

ICBC Asia is offering all new customers a time-deposit promotion, under which a 388-day, HK$100,000 deposit pays 2.08 per cent, while HK$800,000 would earn 2.18 per cent. The promotion started from April 3 and will last until June 29.

HSBC, the city’s largest lender, pays less than 2 per cent interest, but with the lowest threshold at only HK$10,000, earning a higher 1.6 per cent interest rate on six-month deposits, and 1.8 per cent over 12 months.

“Initially, banks pay more to attract larger time depositors,” said Eddid Securities’ Lo. “Small customers could be next.”

The bank has increased its interest rates twice this month on May 2 and 16 to their current levels.

Citi has also been less aggressive in its rate amounts, but more flexible on deposit amounts.

Existing clients with HK$10,000 can get 1.3 per cent for a three-month deposit while new customers with HK$50,000 or more for a three-month time deposit will earn up to 1.5 per cent, from May 4 until May 25.

George Leung, a HSBC adviser for the Asia-Pacific, said Hong Kong’s interest rates are certainly on the way up.

“A number of banks have increased their time deposit rates several times this year, with some offering up to 2 per cent for a 12-months fixed term,” he said. “This reflects just how a local, upwards rate cycle has already begun. The eventual increase in their best-lending rates [the interest rate at which banks lend to favoured customers] is the last sign to be seen in a rising cycle.”

It would be hard to predict when best lending rates would stop increasing, as much depends on market conditions, Leung said.

“Many new-economy companies will float shares in Hong Kong over the second half of this year, which may also interrupt the current Hibor trend,” he said. “It is difficult to judge when best lending rates will rise in Hong Kong due to the ‘complexity of the conditions involved.”

Commercial banks could increase their best lending rates as soon as June, soon after the US Federal Reserve is next expected to raise its interest rates, Lo said.

HSBC’s best lending rate is currently 5 per cent while other lenders range between 5 to 5.25 per cent.

The last time HSBC increased its best lending rate was March 30, 2006, when it increased it by 25 basis points from 7.75 per cent to 8 per cent.

That was then followed by the interest rate cutting cycle, and the last time it changed its best lending was almost a decade ago on November 10, 2008, when it was lowered by 25 basis points to the current level at 5 per cent.