Bank Profits

inSight

16 Sep 2004

Bank Profits

Hong Kong's banks have generally reported strong profits for the first half of 2004. The prospects look good, despite an increasingly complex and challenging external environment.

The reporting season for half-year results is over. Many banks reported a large increase in profits in the first half of this year, compared with the same period of last year. The increase in profits of retail banks, for example, averaged 26% (All the figures I will quote are for the retail banks.). This is notwithstanding a continued compression in the net interest margin resulting from competition, which was partly offset by a continued increase in non-interest income. This is a welcome development, not only for the banking sector, but also for the banking supervisor as well, given that improved profitability is often associated with stability.

One factor contributing to this pleasing development was the improvement in the asset quality of banks, which translated into a lower bad debt charge. Furthermore, there was significant write-back of bad debt provisions made earlier. It is clear, looking at it from the borrowers' point of view rather than the lenders', that the financial position of borrowers has been generally improving, in line with the recent economic recovery.

So, after half a decade of historically high problem loan ratios, started off by the Asian financial crisis and exacerbated by economic recession and the bursting of the property bubble, the ratios are now back to more normal levels. The overdue and rescheduled loan ratio, for example, was 2.09% at the end of June this year, much the same as before the crisis in 1997. Personal bankruptcies and credit card write-off ratios are down, and negative equity mortgages are much less of a concern now. The improvement in the ability to service debt seems to be widespread across all sectors of the economy.

This, of course, is good news. But what we have all been waiting for as evidence that things are indeed "back to normal" is a resumption in lending growth. Prospective customers will only borrow more money when they have confidence in the economy - for example, the economy is growing, their employment is secure, their company's prospects are good and asset prices are rising. For some time now, while the economic data has indicated that the economy is recovering well, the banking data have indicated that the recovery has been largely consumer-led: consumer borrowing has been increasing but corporate borrowing has remained stagnant.

The latest data, however, suggest that the economic recovery is broadening, in that bank lending has started growing more strongly - by 2.4% in the second quarter (This is not a year-on-year growth rate. Loans to customers in Hong Kong at the end of June were 2.4% higher than that at the end of March.). Furthermore, the growth is now not just in consumer lending, but also in trade financing (up 17% in the second quarter) and corporate lending (for example, lending to the manufacturing sector increased by 7.6% in the second quarter). This is most encouraging. A recovery that is broader-based could be more sustainable.

The banks in Hong Kong are profitable and liquid, and now the demand for lending is on the rise again, as confidence in the economy grows and the investment climate improves. While things are looking up for the banking system of Hong Kong, after weathering one of the most difficult periods in the history of the Hong Kong economy, we must all continue to be on the alert in identifying and managing banking risks prudently. The external environment remains complex, with the world economy under the continuing threat of terrorism, imbalance in international payments, high oil prices and the prospects of higher interest rates. Specifically for Hong Kong, the success or otherwise of macro-economic adjustment in Mainland China is likely to have important implications for us. As an open international financial centre with high market liquidity, instruments traded in our financial markets are increasingly used internationally to hedge against exposures to the Mainland. This role carries with it the possibility of greater market volatility and risks for financial market participants, including banks.

 

Joseph Yam

16 September 2004

 

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