HK banks may need new capital for China loans, local mortgages

June 05, 2015 09:55
Shares of both HSBC (left) and Standard Chartered have underperformed the Hang Seng Index in the past six months. Photo: Bloomberg

Hong Kong banks may need new capital to cope with home-loan risks in the city and rising bad debts in China. Along with a probable US interest rate increase, these factors might put extra pressure on the city's lenders, which face tighter capital requirements by the Hong Kong Monetary Authority.

China's bad debts rose in the first quarter, extending last year's 42.3 percent increase. All Hong Kong banks with China operations increased bad debt provisions in 2014. Risks of a property bubble may also add capital pressure on city lenders, as Hong Kong home prices surged 1.5 times since the Global Financial Crisis.

The HKMA may enforce a minimum 12 percent core Tier-1 capital ratio for major lenders in 2019. The proposed requirements would include buffers to conserve capital, counter the credit cycle and cover systemically important banks.

While Tier-1 ratios at the six banks averaged 12.5 percent last year, bad-debt coverage ratios at Hang Seng Bank (00011.HK), Bank of East Asia (00023.HK) and others were less than 100 percent, which may mean that provisions are still inadequate.

In the past six months, HSBC's (00005.HK) share price fell 4 percent while Standard Chartered's (02888.HK) rose 7 percent. Both lenders, with sizable operations in Hong Kong, underperformed the 18 percent rise of the Hang Seng Index.

Dah Sing Bank (02356.HK) led peers with a 36 percent surge in share price, partly because small lenders are viewed as potential takeover targets.

The views expressed in this article are those of Francis Chan, a senior banking analyst at Bloomberg Intelligence.

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