Editorial | Reclassified commercial property loans are no cause for panic
The Monetary Authority’s clarification on commercial property is about maintaining vigilance, not sounding the alarm
Call it the three stages of commercial property loan grief. It’s not the kind of technical metrics that usually get newspaper readers all hot and bothered. But since the local market has been going through a prolonged slump, people are getting an education in commercial real estate finance. The latest news has been the exposure of HSBC, the city’s largest lender, to the sector. Almost three-quarters of its commercial property loans were supposedly flashing warning signals by the end of June. HSBC reportedly accounts for US$32 billion of the city’s total US$234 billion in such loans.
More loans are being reclassified at higher stages of credit risk, such as at stage 2 for significantly increased risk and stage 3 for signs of impairment. But if that is indicative of the city’s overall loanbook, the overall classified loan ratio – a key measure of borrowings considered substandard, doubtful or at loss – should worsen.
But that’s not the case. On the surface, those headline numbers certainly sound alarming, with hints of a property sector collapse and a banking crisis. In context, though, there is less to this than meets the eye.
About 73 per cent of HSBC’s commercial real estate loan book was classified as “satisfactory or stronger” in June, compared with 75 per cent in December. Stage 2 classification shows a deterioration in credit quality, unavoidable in a gloomy market. But rather than being indicative of default, it is a pre-emptive classification, or early warning. It calls for caution, not alarm.
About 80 per cent of those cases have a loan-to-value ratio of less than 70 per cent, meaning they are well within the safe loan parameters, thus limiting the bank’s exposure.
According to the Hong Kong Monetary Authority (HKMA), the local banking industry’s classified loan ratio was 1.97 per cent at the end of the second quarter, little changed from 1.98 per cent in the first quarter. The long-term average is around 2 per cent. At its worst, the ratio was 7.4 per cent in 1999, following the Asian financial crisis.