Pre-tax profits rise at Hong Kong banks for third year, but loan growth decline may weigh on sector in 2019

Pre-tax profits at Hong Kong banks rose for a third straight year in 2018, thanks to a wider interest margin after the lenders raised their prime lending rate for the first time in 12 years, the Hong Kong Monetary Authority said on Thursday.

Growth in pre-tax profits in 2018 was also higher, at 19.4 per cent; it stood at 15.7 per cent in 2017 and 8.3 per cent in 2016. The sector recorded a decline of 2.8 per cent in 2015.

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The banks’ net interest margin, or the difference between interest income earned from loans and interest paid for deposits, stood at 1.62 per cent in 2018, compared with 1.45 per cent in 2017 and 1.32 per cent in 2016.

Major banks in the city will announce their 2018 results over the next two months and Arthur Yuen Kwok-hang, deputy chief executive at the HKMA, Hong Kong’s de facto central bank, said last year had been good for the sector, with good profitability.

But he also issued a warning about the risks that lay ahead, and said the US-China trade war had already led to declines in loan growth in the second half of last year.

“This has resulted in full-year loan growth of 4.4 per cent in 2018 – much lower than the 16.1 per cent in 2017,” he said.

Analysts shared this view. Louis Tse Ming-kwong, director of Hong Kong brokerage VC Wealth Management, said: “The banking sector did well in 2018, but it is going to face a tough and challenging year in 2019. The investment market is volatile, while the mainland and Hong Kong economies are slowing down. These will cut down loan demand and increase bad debt.”

The Hong Kong banks are expected to gain from the first increase in the prime lending rate in 12 years, implemented in September 2018, as well as from an increase in the interbank mortgage rate. The interbank interest rate rose by double last year after the HKMA followed the US Federal Reserve in increasing the base lending rate four times by one percentage point.

The Hong Kong dollar has been pegged to the US dollar since 1983, and this means the HKMA has to follow US rate decisions to maintain stability in the local currency.

The classified loan ratio, the proportion of bad and doubtful loans to the total loan amount, fell to 0.54 per cent in September 2018, compared with 0.56 in 2017.

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The monetary authority, meanwhile, said it would continue to focus on financial technology in 2019. In the first quarter this year, it will issue a first batch of virtual banking licences, said Yuen. Analysts said this would push traditional banks to develop their own fintech offerings.

Yuen added that some banks had reported an increase in attempted cyberattacks last year – twice as many as that in 2017.

“With an increasing number of banks using fintech to serve clients, cybersecurity will be a focus for the HKMA. We will check on whether banks have the ability to recover quickly after a cyberattack. Customers should also beware of the need to protect their personal information,” he said.

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Yuen said the authority will also check on banks using algorithmic trading to see whether they have sufficient risk management in place.

And while property prices have declined in recent months, he said this had not led to a big increase in bad mortgage loans.

“The HKMA has always requested that banks adopt a prudent approach to managing their mortgage business. We have no plan to relax our mortgage policy, although we will closely monitor the market situation,” he added.