In the latter half of 2024, four major Hong Kong banks—Bank of East Asia (BEA), Dah Sing Bank, China CITIC Bank International, and Nanyang Commercial Bank—experienced a significant upturn in their financial performance compared to the first half. According to CreditSights by Fitch Solutions, this improvement was driven by enhanced margins and income levels. However, these gains were overshadowed by lingering concerns over commercial real estate (CRE) risks, which continue to pose challenges for asset quality metrics.
Despite the positive momentum observed in H2 2024, CRE exposure remains a critical issue for these institutions. As reported by CreditSights, CRE accounts for a notable portion of each bank's loan portfolio, ranging from 10% to 21%. The report highlights insufficient provisions set aside for potential CRE-related risks within Hong Kong’s market. Moreover, the overall health of these banks' assets appears fragile, marked by high credit costs exceeding 100 basis points, non-performing loan (NPL) ratios between 2-3%, and reserve coverage rates as low as 35-55%.
Net interest margins (NIMs) showed mixed results throughout FY2024. While three of the banks experienced slight declines in NIMs by 2 to 5 basis points, Dah Sing stood out with a substantial 16 basis point increase. This divergence is attributed to stronger performances in the second half of the year, reversing earlier downward trends seen in the first half.
In terms of non-interest income, FY2024 brought about an upward trend, largely fueled by increased revenue from brokerage and wealth management activities during the latter part of the year. For Nanyang, however, the rise in fee income was not enough to compensate for a sharp drop in commissions related to loans and bills.
Looking ahead to 2025, projections suggest that NIMs will likely decline compared to previous levels. Loan growth is expected to remain sluggish, complicating efforts to achieve robust net interest income expansion. Although there remains potential for further growth in non-interest income, sustained capital market recovery would be necessary to match the exceptional figures recorded in FY2024, which benefited significantly from a low base in FY2023.
As these banks navigate through ongoing challenges posed by CRE risks and weak asset quality indicators, they must also prepare for more modest growth expectations in the coming year. Balancing improved operational efficiency with strategic risk management will be crucial for maintaining profitability amidst uncertain market conditions.