HONG KONG MONETARY AUTHORITY Annual Report 1996
PERFORMANCE OF THE BANKING SECTOR
IMPROVED ENVIRONMENT IN 1996
The Hong Kong banking sector enjoyed an improved operating environment in 1996 relative to 1995 despite a number of new challenges. The banking sector remained well capitalised, highly liquid and profitable. The industry reported strong growth in operating income on the back of increased margins and a recovery in domestic lending, although growth in operating profits moderated somewhat due to an increase in the bad debt charge. While the slowdown in external trade reduced demand for trade financing loans, this negative effect was offset by the strong rebound of the property market and mortgage lending.
On the funding side, strong growth in Hong Kong dollar deposits reduced the need for banks to bid aggressively for deposits. This in turn resulted in improved interest rate margins. However, competition within the industry for lending business increased notably during the year as evidenced by the so called "price war" in the mortgage market. Provisions for bad debts increased significantly on the back of the slowdown in the domestic economy in 1995 and early 1996 and the credit squeeze in China.
LOWER FUNDING COST
During 1996, lower interest rates, combined with increased activity in the stock and property markets, increased the relative attractiveness of holding liquid balances. In line with the 25 basis points cut in the Fed funds rate, HIBOR and Hong Kong dollar time deposit rates declined in the first half of 1996. While market expectations of a rise in US rates in the third quarter prompted some hardening of domestic rates, average funding costs remained significantly lower during 1996 than in 1995 (Table 2). These factors led to a change in the composition