Hong Kong's biggest banks find themselves in a vice as they cut rates for the first time in 11 years during city's recession
Hong Kong's three largest banks are lowering their prime rates for the first time in 11 years to support local businesses. The cuts are likely to renew pressure on their margins at an awkward time, as the city's economy shrank deeper than expected and slipped into its first technical recession in a decade.
HSBC, Standard Chartered Bank and Bank of China (Hong Kong), the city's three currency issuers, will all cut their best lending rate by 12.5 basis points, taking their cues from a quarter-point cut in base lending rate by the local monetary authority.
The best rate at HSBC and Bank of China will stand at 5 per cent, while the rate at Standard Chartered will drop to 5.25 per cent, according to announcements on Thursday. Savings rate on US dollar and local currency deposits will be slashed to 0.001 per cent, putting the city a whisker's width from zero interest rate.
That leaves little room for any of the big banks to further ease rates without hurting their books in one of their better-performing markets, analysts said. While Hong Kong and Greater China provide the biggest source of income, growth in the region has tapered amid the onslaught of US-China trade war. China's economy grew at the slowest pace on record last quarter, while Hong Kong has slipped into a technical recession amid anti-government protests.
"The best lending rate has never fallen below 5 per cent, as banks have to maintain a margin spread with their savings rate," said Kenny Ng Lai-yin, an equity strategist at Everbright Sun Hung Kai. In addition, traditional lenders will face heightened competition in the coming months from eight virtual banks approved by the authorities, he said.
The Hong Kong Monetary Authority (HKMA), the city's de facto central bank, lowered its benchmark rate for the third time in as many months on Thursday in lockstep with another round of policy easing by the US Federal Reserve. All three of Hong Kong's large banks kept their rates unchanged through the monetary authority's policy easing in August and September.
Hong Kong eases monetary policy as economy heads into recession
At 5 per cent, the best lending rate in Hong Kong now matches the trough during 2008 financial crisis, regarded as a key threshold for lenders to sustain their profitability in the city, according to Everbright and VC Asset Management.
Trimming their best lending rates below that threshold "would be hard for [the banks] to make any profit," said VC's managing director Louis Tse Ming-kwong.
Profit at HSBC slumped 24 per cent last quarter, the most since 2016, amid an erosion in net interest margins. The UK lender had US$308 billion in loans outstanding in Hong Kong last quarter, or 64 per cent of its customer lending in Asia.
Greater China and North Asia contributed 40 per cent of operating income at Standard Chartered last quarter, while lending in Hong Kong "moderated" during the three months. Hong Kong's traditional lenders may need to offer higher interest rates to prevent their customers shifting deposits to virtual banks, Ng said.
"This could cut down their margins and make it harder for them to further cut their best rates," he said.
Hong Kong home prices in four-month losing streak as protests intensified
HSBC, which traces its root to Hong Kong and Shanghai nearly two centuries ago, said it can shoulder any impact on its profitability as part of its social responsibility to support local businesses.
"The rate cut level may be small, but it could still be able to lift the burden of the companies and stimulate private consumption," George Leung, an adviser to HSBC in Asia-Pacific, said in a briefing. Hong Kong's economy shrank more than expected by 3.2 per cent in the third quarter from the preceding three months, according advance estimates published by the statistics office on Thursday. Five months of street protests have dented retail sales and tourism, while declines in home prices accelerated through September, a separate report showed.
Investors responded to the rate cuts with mixed reaction. HSBC's shares rose 0.4 per cent in Hong Kong, while Bank of China (Hong Kong) fell 0.4 per cent. Standard Chartered's shares fell by as much as 2.8 per cent in London trading after the rate cuts were announced.
Notwithstanding that, lower borrowing costs can help homeowners save about HK$256 per month, based on a HK$4 million 30-year loan priced at prime rate minus 2.75 per cent, according to an HSBC mortgage calculation tool. That works out to HK$92,254 of interest savings over the loan tenure.
For depositors, they could earn HK$1 a year on HK$100,000 placed with the bank. With a savings rate near zero, HSBC has possibly made its last reduction, Leung said. "It is close to zero and there is no way to cut it any further," he added. "We have no intention to go for a negative interest rate."
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2019 South China Morning Post Publishers Ltd. All rights reserved.
Copyright (c) 2019. South China Morning Post Publishers Ltd. All rights reserved.
