Hong Kong banks' system loans dipped 0.4%, dragged by outside loans and trade finance

USD and HKD deposits jumped as RMB shrank.

The HKMA’s August monetary statistics showed system loans declined 0.4% m/m, led by trade finance and loans for use outside HK.

According to a research note from Barclays, US$ and HK$ deposits rose while RMB deposits contracted. Barclays believes this was largely a result of RMB depreciation expectations against the USD/HKD and further softening of sentiment in the Chinese economy which reduced loan demand in Hong Kong but a rise in demand for US$/HK$ deposits.

Bank of China (Hong Kong) remains Barclays' preferred name among the local Hong Kong banks, as the planned sale of Nayang Commerical Bank along with its repositioning to become the regional arm of BOC Group are ROE accretive, in Barclays' view.

Loan contraction continues from weaker trade-related loans: System loans declined by 0.4% m/m led by loans for use outside Hong Kong down by 2.2% m/m and trade finance which fell by 1.2% m/m. Loans for use in HK rose by 0.5% m/m.

Barclays believes the decline in trade-related loans and loans for use outside HK which are Mainland related is because of RMB deprecation expectations and concerns over slowing economic growth in China, which is affecting loan demand in Hong Kong.

Here's more from Barclays:

Increase in HKD and USD deposit drives growth in system deposits: System deposits in August rebounded from the previous month's drop, recording a 1.2% m/m gain led by US$ deposits which rose 5.1% while HK$ deposits rose 0.4% m/m. RMB deposits fell by -1.5% m/m to RMB978bn.

Both fixed deposits and current and savings deposits increased by 1.0% m/m and 1.4% m/m respectively with CASA now accounting for 55.6% (July 55.4%) of system deposits. System loan to deposit ratio declined to 71.2% in July from 72.4% in June.

Funding costs stable: The composite interest rate, which is a measure of system funding costs, remained stable at 26bp m/m, the lowest since mid-2013, due to lower HK$ deposit funding costs and easier liquidity conditions, in our view.

Sharp slowdown in both primary and secondary loan mortgages: The August mortgage survey showed that mortgage loan approvals declined by 11.8% m/m to HK$24bn due to continued decline in primary market financing (-9.1% m/m) and refinancing (-7.2% m/m), while secondary transactions saw a significant decline of 14.3% m/m. New mortgage loans drawn fell by 15.3% m/m to HK$24bn.

Outstanding mortgages increased by 3.2% m/m as new mortgage loans booked offset principal repayments. Hibor-based mortgages accounted for 82.7% (June: 84.5%) of new mortgages approved. The average system mortgage rate was relatively flat, declining by 1bp to 2.25% based on our calculations.