Hong Kong Also Has a Bad Debt Problem

By Christopher Langner / August 24, 2016 / Bloomberg

Concerned about the bad debt problem in China? Maybe it’s time to worry about Hong Kong. Whether because of a spillover from the mainland’s troubles or falling property prices at home, the city’s soured loans have suddenly spiked.

Earlier this week, Bank of East Asia reported that its nonperforming loans in Hong Kong almost doubled between the end of December and June 30. The lender had already been dealing with an increase in delinquencies in China, where it has the second-largest branch network after HSBC. It’s now putting out a similar fire closer to home.

Unhappy Import
After dealing with a spike in nonperforming loans in China, Bank of East Asia now faces the problem at home

In its interim results, the bank offered the most detailed breakdown of bad debts among the five Hong Kong-domiciled publicly traded lenders. Nonperforming loans in Hong Kong jumped to HK$1.75 billion ($226 million) from HK$886 million at the end of December. The report showed that residential mortgages and loans to retailers are the ones souring the fastest, though it’s unclear how much China has contributed to the deterioration (Hong Kong companies that have borrowed to invest in mainland businesses could be among those coming under stress). BEA Hong Kong’s impaired loan ratio rose to 0.49 percent from 0.34 percent at the end of 2015.

Cracked Ceilings
Among the areas that BEA is most exposed, retail and residential mortgage loans saw the worst rise in delinquency

The Hong Kong Monetary Authority hasn’t noticed any significant increase in residential mortgages turning bad. The three-month delinquency ratio published regularly by the city’s de facto central bank remained unchanged at an ultra-low 0.04 percent between February and June. Still, the overall doubtful loan ratio for Hong Kong retail banks almost doubled to 0.41 percent at the end of March from 0.21 percent at the end of June.

The trajectory of bad loans at BEA matches what investors might expect from a territory where residential property prices have dropped from their 2015 peak and retail sales are under pressure. That means two things may be ahead, neither of them very pleasant for shareholders: equity raisings, which imply dilution, and lower profits, which points to reduced dividends.

Granted, doubtful debts at Hong Kong banks remain extremely low. The 0.41 percent is less than a quarter of the mainland’s 1.75 percent nonperforming loan ratio as of the end of June (a figure that is widely regarded as understating the true level of soured debts at China’s banks).  Read more…


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