The Hong Kong Monetary Authority has warned that local banks may face challenges in maintaining their profitability as uncertainties in the domestic and external climate persist.
In its half-yearly Monetary and Financial Stability Report on Monday, the city’s bank regulator said the aggregate pre-tax operating profit of retail banks fell moderately by 1.5 percent year on year in the second half of last year. As a result, the return on assets declined slightly to 1.13 percent in the second half, compared with 1.23 percent for the same period in 2018.
Multiple downside risk factors in both the domestic and external environments continue to cloud the outlook ahead for banks’ profitability. These factors include uncertainties over the extent of the coronavirus pandemic, future US-China trade relations and heightened geopolitical tensions
The Hong Kong Monetary Authority
While the net interest margin of retail banks narrowed slightly to 1.63 percent in the second half of last year, compared with 1.67 percent for the same period in 2018, retail banks continued to see a mild increase in their net interest income (NIM) during the period.
The HKMA said multiple downside risk factors in both the domestic and external environments continue to cloud the outlook ahead for banks’ profitability. These factors include uncertainties over the extent of the coronavirus pandemic, future US-China trade relations and heightened geopolitical tensions.
An intensification of these risk factors could dampen the already sluggish global growth momentum and reduce demand for bank credit. The low global interest rate environment is also likely to persist in view of a broad-based adoption of accommodative monetary policy stances by major central banks, which could pose downward pressure on banks’ NIM going forward.
On the domestic front, the social incidents since mid-2019 have dampened business investment and market confidence. If the unrest persists further in future or intensify amid the already weakening economic environment, this will worsen the credit demand outlook and asset quality of banks.
Despite uncertainties in the external and domestic environment, both the Hong Kong foreign exchange and money markets continued to operate in a smooth and orderly manner. With the Hong Kong dollar remaining firm, the aggregate balance being stable and total deposits growing modestly, no significant outflows from the Hong Kong dollar or Hong Kong’s banking system were observed during the review period. Total loan growth decelerated in the second half of last year after a moderate rebound in the first half. The residential property market has generally softened since mid-2019, albeit showing some fluctuations, the HKMA said.
Despite softer housing prices since mid-2019, housing affordability remained stretched. The housing price-to-income ratio reached 17.9 in the fourth quarter of 2019, compared with the 1997 peak of 14.7. In addition, the income-gearing ratio was 80.9 percent in the fourth quarter, well above the long-term average, according to the HKMA.
The outlook for the residential property market is subject to a host of uncertainties and risks as discussed in previous chapters. For example, the coronavirus pandemic, coupled with the current economic recession and the rising unemployment rate, will dampen housing demand and new project launches.
Some external risk and uncertainty factors, such as the pace of global economic growth and the international financial market volatility, may also affect housing market sentiment. On the other hand, the very low interest rates may provide some support to asset markets, while market activity could rebound when the pandemic fades out, as seen in the post-SARS period in 2003.
Over the longer term, the outlook for the housing market will depend on the housing supply-demand gap. Although actual completions in 2019 saw a shortfall compared with the projections, the government expects private housing completions to remain high in the coming years.
