26 October 2016
HSBC last reduced its prime rate in November 2008, to 5 percent. Photo:
HSBC last reduced its prime rate in November 2008, to 5 percent. Photo:

Why HK banks will not rush to follow Fed in raising rates

Hong Kong’s lenders are awash with near-record levels of interbank funds, allowing them to resist the immediate need to pass on any interest rate increase by the US Federal Reserve.

China’s devaluation of the renminbi in August helped drive the aggregate balance of funds in Hong Kong’s banking system to HK$426 billion (US$55 billion) on Nov. 4, the highest level since at least 1997, Bloomberg reported.

While that amount had fallen to HK$391 billion by Tuesday, Australia & New Zealand Banking Group Ltd. estimates that’s more than enough for banks including HSBC Holdings plc (00005.HK) to conduct day-to-day lending operations until early next year before they have to react to higher interbank funding costs.

The finance industry is monitoring Wednesday’s Fed policy meeting for what is widely expected to be the US central bank’s first rate increase since 2006 — a move likely to be echoed soon afterward by the Hong Kong Monetary Authority.

“The strong liquidity now will keep banks from raising rates any time soon,” said Ryan Lam, Hong Kong-based head of research at Shanghai Commercial Bank Ltd.

“There will only be room for the banks to raise rates when the balance is tight. However, it’s not likely to happen for the time being, because loan demand is rather weak.”

Total outstanding loans declined for a fourth straight month in October to HK$7.48 trillion, HKMA figures show.

Meanwhile, mortgage approvals that month dropped 19 percent from a month earlier, the fourth straight decline.

Amid stricter regulations and slowing demand, leading mortgage lenders BOC Hong Kong (Holdings) Ltd. (02388.HK), HSBC and Hang Seng Bank Ltd. (00011.HK) face competition from developers such as Cheung Kong Property Holdings Ltd. (01113.HK) that offer their own financing and stamp duty rebates.

Lenders “are under pressure to keep mortgage rates low”, said Raymond Yeung, an ANZ economist in Hong Kong.

Banks have enough funding to delay rate increases for two to three months, UOB-Kay Hian Holdings Ltd. analyst Edmond Law said.

They will still have to raise their rates at some point as the aggregate balance falls amid outflows of capital from the city into US dollars after the Fed’s liftoff begins, Law said.

HSBC’s best lending rate was last cut by 0.25 percentage point in November 2008 to its current level of 5 percent.

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