Rising interest rates to be Hong Kong banks’ saving grace

NIMs are expected to rise and outweigh asset quality deterioration in the near term.

Hong Kong banks are expected to benefit from a rise in interest rates, which would in turn expand their net interest margins (NIM) and offset asset quality risks and potential loan growth slowdown, at least in the near term, according to Fitch Ratings.

The US regulator is expected to raise rates by another 125 basis points in the second half of 2022, following a 150 bp raise in H1, to 3% by the year’s end. Another 50 bp in rate hikes is expected for the first quarter of 2023, Fitch estimates. Hong Kong’s interest rates move in tandem with US rates, albeit with some lag.

Fitch had earlier estimated that a 100bp rise in short-term rates could widen average NIM for Hong Kong banks by as much as 40 bp and boost operating income by up to 17%.

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Larger banks such as HSBC, Bank of China (Hong Kong), and Hang Seng Bank are expected to benefit more from the rising rates due to their stronger repricing power nad larger deposit bases.

Smaller banks, particularly virtual banks, may benefit less due to their weaker repricing power as well as their tendency to offer more competitive rates to attract deposits, Fitch noted.

However, whilst NIMs are expected to go higher, asset quality risks will also intensify as the rapid rise in rates will hurt borrowers’ repayment ability.

“If rates spike significantly above our expectations, risks posed by weaker asset quality and lower loan demand would increase for Hong Kong banks and could eventually begin to outweigh benefits from higher NIM,” Fitch warned, noting that the associated higher impairment charges may erode the boost to banks’ earnings from wider NIMs.

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On the other hand, banks' tight underwriting and credit-risk management as well as low average loan-to-value ratios for newly approved residential mortgages should mitigate any negative effects.

“We see higher credit costs as being manageable for banks given their loss-absorption buffers,” Fitch added.