Hong Kong Banks Show Promise in H2 2024 Amidst Commercial Real Estate Concerns

In a surprising turn of events, several major banks in Hong Kong reported improvements in margins and income during the latter half of 2024. These findings, revealed by CreditSights, a subsidiary of Fitch Solutions, highlight the resilience of the financial sector despite ongoing challenges posed by the commercial real estate (CRE) market.

The four banks—Bank of East Asia (BEA), Dah Sing Bank, China CITIC Bank International, and Nanyang Commercial Bank—are navigating a landscape marked by economic uncertainty while managing their portfolios more effectively. In fact, while the banks experienced net interest margin (NIM) fluctuations ranging from a drop of 2 to 5 basis points for the year, Dah Sing Bank notably expanded its NIM by 16 basis points, showcasing its adaptability.

Though the second half of the year brought improvements, concerns linger about the asset quality of these banks. CreditSights pointed out that the exposure to commercial real estate—which constitutes a significant portion of the banks’ gross loans, ranging from 10% to 21%—poses a critical risk. As of year-end 2024, these asset quality metrics are still seen as “weak,” with elevated credit costs exceeding 100 basis points and non-performing loan (NPL) ratios hovering between 2% to 3%. Moreover, reserve coverage has been alarmingly low at approximately 35% to 55%.

Despite these concerns, the financial institutions reported a boost in non-interest income, particularly from brokerage and wealth management activities, contributing positively to their bottom lines in H2 2024. However, for Nanyang Commercial Bank, this income surge was not sufficient to mitigate significant declines in loans and bills commissions.

Looking ahead to 2025, analysts anticipate continued pressure on NIMs, forecasting performance to dip below levels recorded earlier in 2024. Soft loan growth is expected to complicate efforts to enhance net interest income. Interestingly, there is optimism surrounding potential growth in non-interest income, particularly if a rebound occurs in Hong Kong’s capital markets, although it is unlikely to reach the elevated heights seen in FY2024.

As these banks brace for the challenges ahead, the interplay between improving income and the lurking risks tied to commercial real estate will be a critical factor influencing their strategies in the coming year. The questions remain: will these banks be able to sustain their recovery, or will they falter under the weight of CRE uncertainties? Only time will tell, but investors and stakeholders are undoubtedly keeping a keen eye on the developments in Hong Kong’s banking sector.