Hong Kong banks report better H2 margins despite CRE risks

Margins and income improved in H2 2024 compared to H1..

Four banks in Hong Kong— Bank of East Asia (BEA), Dah Sing Bank, China CITIC Bank International, and Naynang Commercial Bank— saw a better H2 2024 on the back of better margins and income, according to CreditSights by Fitch Solutions.

However, commercial real estate (CRE) remains a threat to the banks, and asset quality metrics look “weak,” it said.

“We do not think that the banks have set aside sufficient provisions for Hong Kong [commercial real estate] risks,” CreditSights said in a report.

Commercial real estate (CRE) exposure in Hong Kong accounted for 10% to 21% of the banks’ gross loans as of year-end 2024.

“Overall, HK banks’ asset quality metrics look weak, with elevated credit costs above 100 bp, high NPL ratios of 2-3%, and low reserve cover of 35-55%,” CreditSights said.

The four banks saw their net interest margins (NIMs) fall by 2 to 5 basis points (bp) in FY2024, except for Dah Sing, which saw a 16 bp NIM expansion.

Most of the declines occurred in the first half of 2024, however, with the second half of 2024 recorded higher NIMs.

Fee income was higher in FY2024, primary led by a boosted income from brokerage and wealth management in H2. For Nanyang, however, this was insufficient to offset a large decline in loans and bills commissions, CreditSights said.

Other non-interest income was broadly higher for all four banks, it added.

For 2025, NIMs are expected to be lower than a year earlier. Loan growth will remain soft, making net interest income growth challenging, CreditSights said.

Non-interest income reportedly has potential for further growth if the rebound in HK’s capital markets can sustain, but the growth is unlikely to match the levels seen in FY2024, which benefited from FY2023’s low base.