Hong Kong banks can handle CRE risks: analyst

They’ve been implementing measures to lower China-related property exposures.

Hong Kong banks should be able to manage risks related to the commercial real estate (CRE) sector, according to S&P Global Ratings.

High vacancy rates amidst excess supply of office space and weak sentiment from mainland China’s property downturn will continue to weigh on Hong Kong’s CRE sector. Large banks in the city should be able to manage these strains, however.

“This is because the large banks that we rate usually have healthy collateralization on their secured loan books, which we estimate comprise 60%-70% of their domestic CRE exposures,” S&P said in a commentary.

“Hong Kong banks have been implementing measures to lower China-related property exposures and build additional provisions during the past two to three years. The Hong Kong Monetary Authority also closely monitors mainland-related lending,” S&P added.

Credit quality of unsecured Hong Kong CRE exposures will also likely remain manageable given the borrowers are mainly large conglomerates with strong balance sheets and diversified cash flows, S&P said.

“That said, small and midsize banks with significant concentration in CRE exposures could face pressure on asset quality and financial performance. Hong Kong CRE exposures were on average 8%-9% of the total customer loans for the major banks as of end-June 2024,” the ratings agency said.

The banks’ portfolios also have an average loan-to-value (LTV) ratio of 50%-55%, which provides some buffer against a significant drop in property prices.

S&P did warn that ongoing property revaluations could push up the LTV ratios of banks. 

Asset quality of residential mortgage loans should remain healthy, with property prices slipping between 5% to 10% in 2024, and remaining flattish in 2025.

“Amidst abundant supply of housing units in 2025, a notable decline in interest rates should support stabilization of property prices, in our view,” S&P said. 

Potential credit losses for Hong Kong banks should remain contained, on the back of adequate underwriting standards and controlled risk appetite.

Credit losses within the sector are expected to remain between 0.45% to 0.5% on average in 2024 and 2025.