The Hong Kong Monetary Authority (HKMA) published today the classified loan ratio of the banking sector at the end of the second quarter. The ratio was 1.97%, broadly similar to 1.98% at the end of March. As I have mentioned on different occasions, the classified loan ratio continues to face upward pressure, primarily driven by commercial real estate (CRE) loans. Pressures in global CRE (including retail properties and offices) stemming from the rise of e-commerce and remote work in recent years are also evident in Hong Kong. An increase in office completions has also led to continuing adjustments in the prices and rents of CRE in Hong Kong during the first half of 2025. Moreover, the high interest rate environment over the past few years has exacerbated the debt-servicing burden of commercial property developers and investors, drawing market attention and raising questions on the ability of banks to effectively manage the relevant risk exposures and financial stability risk. I hope to clarify these queries here.
Standing together with enterprises
CRE prices and rents are currently under pressure from various factors, including interest rates and market supply and demand dynamics, which have led to a decline in the value of loan collateral. Borrowers are understandably worried as to whether banks will demand immediate repayment. To address this, the HKMA and the banking sector have repeatedly emphasised that while the fall in local property prices and rents in recent years have led to a downward adjustment to the independent property valuations, banks consider a host of factors when reviewing credit limits, including the borrower’s credit demand, overall financial position and repayment ability. Banks will not adjust a credit limit merely due to a change in the value of the property collateral.
There have also been misconceptions that landlords may refuse to adjust rents in response to market conditions or even leave properties vacant out of concern over banks demanding loan repayments. However, this does not align with banks’ actual practices, and is also not logical from a risk management angle. In fact, banks have earlier made it clear that they would not demand immediate repayment solely due to a decline in rental income. This pragmatic and flexible approach demonstrates banks’ willingness to stand together with enterprises, as well as their stance and commitment to ride out difficult times with the community.
If a borrower in temporary financial difficulty breaches the terms of the loan covenant, will it lead to the bank demanding immediate repayment? The answer is not necessarily so. In practice, banks will first negotiate with the borrower, for example, by adjusting the repayment plan such as the loan tenor. Banks will take appropriate credit actions only as a last resort to protect the soundness of their operations and the interest of depositors.
Protecting banking stability and depositor interests
The public may thus wonder if banks’ support for enterprises will come at the cost of banking stability and depositor interests. There is no need to worry as the HKMA has been closely monitoring the overall healthy development of Hong Kong’s banking sector. We believe that the credit risk associated with CRE loans is manageable. A significant portion of Hong Kong banks’ exposures relating to local property development and investment loans are to the large players with relatively good financial health. For exposures to small and medium-sized local property developers and investors, including some with weaker financials or higher gearing, banks have already taken credit risk mitigating measures early on, and most of these loans are secured. Besides, there is no concentration risk at individual borrower level.
A recent media report highlighted the risks associated with CRE loans, with a particular focus on the accounting of banks’ “expected credit losses”. In fact, this is merely a calculation based on modelling for accounting purposes. Loans classified as “expected credit losses” do not necessarily represent bad debts, and therefore cannot be used as a basis for a comprehensive assessment of banks’ asset quality.
Similarly, some other commentaries have focused solely on banks’ classified loan ratios, which provides a somewhat limited perspective. Hong Kong has entered a credit downcycle in recent years, having been affected by factors like macroeconomic adjustment and interest rate level. This has naturally led to an increase in the classified loan ratio of the banking sector. While the classified loan ratio has gradually returned to the long-term average of around 2%, from 0.89% at the end of 2021, the ratio remains far below the 7.43% seen in 1999 after the Asian Financial Crisis.
To gain a comprehensive understanding of credit quality, one can consider the following widely and long-used indicators:
- The first basic indicator is the capital adequacy ratio: The healthy development of the banking sector involves building up capital during the expansion phase of the credit cycle, such that when the credit cycle adjusts and we see credit costs go up and a deterioration in asset quality, banks would have sufficient capital to absorb the credit costs. Banks in Hong Kong have ample capital – the Total Capital Ratio for the banking sector stood at 24.2% at the end of March 2025, well above the international minimum requirement of 8%.
- The second key indicator is the provision coverage ratio: When evaluating non-performing loans, the crucial question is whether the relevant losses will affect a bank’s core foundation. The provision coverage ratio is used to gauge if the provisions for non-performing loans are sufficient. If a bank adopts prudent risk management and its provision coverage ratio stays above 100% after deducting the value of collateral from the non-performing loans, it means that the potential losses from non-performing loans have been adequately reflected in the bank’s provisions. For the Hong Kong banking sector, provisions are sufficient, with the provision coverage ratio (after deducting the value of collateral) standing at about 145% at the end of March 2025.
- The third indicator is obviously financial strength: Despite the greater public attention on non-performing loans, one important criterion when evaluating a bank’s soundness is whether the bank can maintain good financial strength and its profit model can be sustained after deducting credit costs. In this regard, Hong Kong’s banking system recorded profit growth in the last three consecutive years even after taking into account the expenses for expected credit losses. The overall pre-tax operating profit of retail banks increased by 8.4% year-on-year in 2024, and by 15.8% year-on-year in the first quarter of 2025, demonstrating sound financial strength.
These three key indicators show that Hong Kong’s banking system is well-capitalised and has sufficient provisions and good financial strength to withstand market volatilities. In the face of a still-challenging macroeconomic environment, the credit risks faced by the banking sector have increased in recent years, yet the profit models of banks have not been affected. I would also like to take this opportunity to clarify the earlier “bad bank” rumour. The establishment of a “bad bank” is an extraordinary measure which would only be considered when banks have very serious balance sheet problems. This is entirely inconsistent with the current situation of banks in Hong Kong, which are operating in a sound manner with strong financial strength.
Hong Kong’s banking sector has safely sailed through the 1998 Asian Financial Crisis, the 2008 Great Financial Crisis, the few years following the Covid-19 pandemic as well as the 2023 banking turmoil in the US and Europe, demonstrating its strength and resilience. Although the global economic outlook is subject to various uncertainties and many industries have been severely impacted, the banking sector has remained sympathetic to customers in difficulties and has been riding out challenges with them, one crisis after another. This is a testament to both the ability and commitment of the banks to weather difficult times with the community. The HKMA, together with the banking sector, will continue to do their utmost to support the development, upgrade and transformation of the real economy.
Eddie Yue
Chief Executive
Hong Kong Monetary Authority
13 August 2025
