Hong Kong rate cuts provide ‘modest’ relief to borrowers

Banks in the city still face profitability pressures, CRE-related woes.

Hong Kong’s recent 50 basis point (bp) rate cut will provide only modest relief to borrowers, says Fitch Ratings.

Banks in the city still face profitability pressure stemming from lower interest margins as rates fall. This is mitigated by banks’ contained credit costs, interest income, loan growth, and non-interest income, Fitch said in its commentary, “Hong Kong Bank and Property Sector Pressures Linger as Monetary Easing Begins.”

Banks’ non-interest income notably benefited from strong outbound investment from mainland China. Fitch expects this to continue in the near term, given the interest rate gap between the mainland and key offshore markets.

Hong Kong’s base rate is expected to be cut by a further 150bp by end-2025, in line with US policy rate cut estimates.

In turn, the Hong Kong Interbank Offered Rates should follow the base rate lower. 

“This will improve funding conditions for stronger entities in the territory’s property sector. However, their financing access has generally been robust,” Fitch Ratings said.

Residential property sales may benefit from rate cut expectations and support developers’ cash flow generation. 

Currently, major Hong Kong banks logged worsening credit quality on local exposures, led by domestic commercial real estate (CRE). 

“We project impaired loan ratios related to Hong Kong CRE will deteriorate further in the near term, despite lower interest rates, given that cashflow mismatches of property-focused companies - especially those focused on office and retail segments - are unlikely to improve materially soon,” Fitch said.