Hong Kong’s banks are having their worst time since 2008 as profits plunge while bad loans soar amid city’s recession

The city last saw a similar level of decline in 1998 when its gross domestic product contracted by 5.1 per cent, as the Asian Financial Crisis battered the local economy.

Net interest margin, the gap between borrowing costs and interest income, have narrowed in Hong Kong, which translates to falling profitability for banks that rely on the gap for their profits. The margin narrowed to an average of 1.18 per cent in 2020, from 1.63 per cent in 2019. Total loans grew only 1.2 per cent last year, less than a fifth of the 6.7 per cent increase in 2019.

HKMA has instructed banks to extend their six-month loan repayment holiday for small businesses until April, providing more breathing space for some of the biggest job providers in the city.

Under the concession which started last May, around 4,000 qualified corporate borrowers are allowed to repay only the interests on their loans, but not the principal. Many Hong Kong legislators have warned of a surge in bankruptcies if the repayment holiday ends in April.

Still, Hong Kong’s banks are weathering the economic malaise from the pandemic better than other major banking centres around the world, where the bad debt ratio have risen to between 1 per cent and 2 per cent, higher than the city’s ratio.

“The banking sector overall is still holding well, as the capital ratio stood at 20.3 per cent and the total deposits increased 5.4 per cent last year, among the highest worldwide,” Yuen said. “The local banking sector is still very stable and resilient.”

Adding to the challenging times for banks, the industry is becoming more competitive with the entry of eight virtual banks, or financial institutions that are licensed to operate purely online without the need for physical bricks-and-mortar branches. The eight banks have attracted 500,000 customers with a combined HK$15 billion in deposits and HK$1 billion in loans.

“This is not substantial, but it is good to see that the virtual banks are having a stable growth,” Yuen said.

He said the HKMA this year will continue to work with People’s Bank of China to allow tourists to use digital currency when travelling across the border.