Investors will be looking for any warning signs in the mainland lending portfolios of Hong Kong’s banks as they prepare to report their third-quarter results against the backdrop of rising concerns about China Evergrande Group’s debt crisis and its potential effects on China’s property sector. HSBC will be the first of the city’s three currency-issuing banks to update investors on its third-quarter performance on Monday, followed by Bank of China (Hong Kong) on Friday and Standard Chartered on November 2. Other big banks with operations in the city that are expected to report their results in the coming weeks include Singapore’s DBS Group Holdings and Oversea-Chinese Banking Corp, the parent of OCBC Wing Hang, as well as the Hong Kong arms of Bank of Communications, China Construction Bank and Industrial and Commercial Bank of China (ICBC). “Liquidity events in the China property sector should have limited direct impact, although we remain watchful of any second-order impact,” Citi analyst Yafei Tian said in a research note. About 45 per cent of loans by the city’s banks are deployed to Chinese entities for use in the mainland, Tian said. However, the banks are still likely to beat forecasts for provisions on soured loans in the third quarter, she said. Evergrande, China’s biggest residential home builder by sales last year, is struggling under the weight of US$305 billion in total liabilities following years of expansion beyond its core property businesses and concerns about its ability to repay its massive debt load are roiling financial market globally. The Shenzhen-based property developer’s suppliers say they have been struggling for months to get paid, potentially exacerbating the economic effects if the company collapses . Earlier this month, Financial Secretary Paul Chan Mo-po said the Hong Kong financial sector’s exposure to the Evergrande crisis is “very minimal” . At HK$14 billion (US$1.8 billion), the amount represents 0.05 per cent of the local banking assets, he said, posing no threat to the city’s financial stability. The Hong Kong Monetary Authority previously said in September that the overall risk to banking stability “remains manageable” . HSBC CEO Noel Quinn told a banking conference in September that the Evergrande situation was “concerning”, but he was not worried about the lender’s exposure. It was one of several big banks and fund managers who reduced their exposure to the world’s most indebted property developer as its cash crunch worsened their summer, with HSBC selling its holdings in Evergrande from its China bond portfolios and Asia credit portfolios. Standard Chartered chief financial officer Andy Halford has said the bank had “no direct exposure and negligible indirect exposure” to the embattled developer. HSBC and Standard Chartered are both based in London, but generate much of their revenue in Asia, with Hong Kong as their largest market. For now, analysts do not appear to be too concerned about Evergrande overwhelming banks, particularly as Chinese authorities are expected to step in if the situation in the property market worsens. Several other mainland property developers, including Fantasia Holdings Group and Sinic Holdings, have defaulted on their debt in recent weeks. HSBC’s third-quarter pre-tax profit is expected to rise 23 per cent to US$3.77 billion, including US$236 million in expected credit losses, according to a consensus estimate compiled by the bank. That compared with US$3.07 billion in the prior-year period when it raised its expected credit losses for the first nine months of the year to US$7.6 billion . Mainland China accounted for 6.8 per cent of HSBC’s lending to corporate and commercial customers and nonbank financial institutions in the first half of the year, as well as 2.3 per cent of its personal lending in the period. The International Monetary Fund (IMF) said this month that Beijing has the tools available to manage potential financial stress and lessen any adverse economic effects on the economy, but faces “challenging trade-offs” in addressing the crisis, including reinforcing the impression that some firms are too big to fail. “In the case of a sharp property downturn, we expect both fiscal and monetary policies to ease further towards the end of 2021,” said Zhang Ning, UBS’s senior China economist. “With a delay, some modest easing of property policies may come as well, but we don’t expect a 2015-16 style wholesale easing of national property policies.” At the same time, expectations are building for big banks to announce potential share buy-backs as the economic outlook has improved and HSBC’s and Standard Chartered’s chief regulator in the United Kingdom removed restrictions on investor payouts put in place in the early days of the coronavirus pandemic last year. Both Standard Chartered and HSBC said in August that they would restore their interim dividends, with Standard Chartered saying it would buy back an additional US$250 million in shares after announcing a US$255 million repurchase in the first quarter. HSBC said at the time that it would consider potential share buy-backs in the second half of the year, with analysts expecting the bank to announce up to a US$1 billion buy-back as soon as its third-quarter results. The improving economic picture globally has prompted banks to begin to release tens of billions of dollars in reserves they set aside for potential soured loans last year. American rival JPMorgan Chase reduced its reserves by US$2.1 billion in the third quarter, with CEO Jamie Dimon saying the global pandemic and its economic fallout is moving into the rear-view mirror. Profits jumped 48 per cent at Citigroup and 58 per cent at Bank of America after they released some of their reserves for soured loans in the quarter. At the same time, the US Federal Reserve appears closer to moving forward with a plan to reduce its bond-buying stimulus measures as soon as next month, according to the minutes from its September meeting. That could give the Fed more flexibility to raise rates next year as concerns about inflation grow. An increase in interest rates following an extended period of historically low rates could help the bottom line of banks, which have placed a greater emphasis on wealth and other fee-based products in recent years to bulk up their results. “Participants generally assessed that, provided that the economic recovery remained broadly on track, a gradual tapering process that concluded around the middle of next year would likely be appropriate,” according to the Fed minutes .