Bank lending slows to 9.5% in July amidst threats of higher borrowing costs

This represents the slowest pace of growth in over one and a half years.

Total loans and advances extended by Hong Kong banks rose by a measly 9.5% YoY to $9.77t in July in what is the slowest pace of growth since January 2017 as lending activity took a blow from tighter liquidity and escalating trade tensions, according to OCBC Treasury Research.

Loans for use in Hong Kong (excluding trade finance), which account for 64.3% of total bank lending, booked its weakest showing since end-2016 as brewing tensions between US and China increasingly clouds the SAR’s economic outlook.

Banks also held back lending amidst fears of steeper funding costs. “Market increasingly expects that borrowing costs will edge higher following HKMA’s liquidity withdrawal and the Fed’s gradual tightening,” noted OCBC.

Also read: Peg defense boosts interbank borrowing costs to two-month peak

On the other hand, loans for use outside of Hong Kong remained flat at 10.4% YoY after China rolled out a number of stimulus measures to boost funding support for credit-short SMEs.

Also read: Non-bank Chinese exposure of Hong Kong banks doubles to 15% in 2017

Total deposits increased by 3.5% YoY. HKD demand and savings deposits dropped 1.8% YoY and 1% YoY respectively whilst HKD time deposits surged 14.2% yoy, added OCBC.

HKD fixed deposits ($2.56t) to total HKD deposits ratio rose to the strongest in four years at 38.1%. HKD loan-to-deposit ratio reduced slightly from 85.4% in June to 85.1% in July.

Renminbi deposits in Hong Kong also rose by 3.9% to $697.59b (RMB607.6b) at the end of July with the total remittance of renminbi for cross-border trade settlement hitting $415.15b (RMB361.6b).

Against the threat of rising borrowing costs, OCBC believes that Hong Kong banks can no longer delay a hike in prime rates any longer.

“With possible slowdown in loans growth, banks’ need to scramble for funds may become less imminent. However, the pressure on the net interest margin could remain high given the strong growth of HKD fixed deposits and the expected uptrend of HIBOR. Therefore, we still believe that banks will raise prime rate by 25bps this year.”

OCBC expects Hong Kong bank loan growth to fall gradually to 5% by end-2018.

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