Overview

Net interest margin

The average NIM⁵ across all surveyed licensed banks increased by 24 basis points compared with 2021, driven by the higher interest environment with a relatively steeper yield curve and wider credit spread on financial assets. The total net interest income of all surveyed licensed banks increased by 23.7 percent from HK$224 billion in 2021 to HK$277 billion in 2022, contributed by a 47.3 percent increase in interest income and partly offset by a 113.5 percent increase in interest expenses. The average NIM for the top 10 licensed banks in 2022 increased to 1.36 percent from 1.14 percent in 2021. All the top 10 licensed banks recorded an increase in NIM.

Among the top 10 licensed banks, DBS Bank (Hong Kong) Limited (DBS), Hang Seng Bank, Limited (Hang Seng) and The Hongkong and Shanghai Banking Corporation Limited (HSBC) recorded the top three largest NIM in 2022. DBS also recorded the largest increase of 46 basis points from 1.33 percent in 2021 to 1.79 percent in 2022. For DBS, net interest income also increased due to the expansion in both the loans and investment securities of the bank by 15.4 percent and 68.3 percent respectively during the year⁶. 

Hang Seng’s NIM improved to 1.77 percent in 2022 from 1.49 percent in 2021. The increase was largely driven by the 17 basis points increase in deposit spreads and 11 basis points increase in net-free fund contribution, which resulted from the bank’s proactive management of its assets and liabilities amid global interest rate hikes⁷. 

The NIM of HSBC increased by 30 basis points from 1.37 percent in 2021 to 1.67 percent in 2022. The increase was mainly attributed to wider customer deposit spreads and higher reinvestment yields⁸.

In our view, the higher interest environment is, in general, positive for the banks. While future US interest rate movements are subject to a host of uncertainties, there is a view that there will be at most one or two more rate hikes in 2023. 

Hong Kong banks, particularly major banks with larger current and savings account (CASA) balances, have benefited from rising interest rates. However, one notable feature of 2022 is that as interest rates increased, funds flowed out of CASA to seek yield. CASA contributed 47.8 percent of total deposits at the end of 2022 compared to 61.5 percent at the end of 2021. Going forward, we can expect more competition on pricing for customer deposits.

Cost-to-income ratios

Under inflationary pressure, cost management remained an essential focus for banks in Hong Kong to improve profitability. There was some positive news in this area as the cost-to-income ratio for the surveyed banks on average decreased by 4.8 percentage points for the year ended 2022 to 49.4 percent. This was driven by a 12.6 percent increase in operating income, partly offset by a 2.9 percent increase in operating expenses to HK$215 billion for the year ended 2022. Compared to the increase in operating expenses of 8.8 percent from 2020 to 2021, we can see that banks have been focusing on the cost management. 

While Hong Kong’s domestic economic activities gradually revived alongside the generally stable local pandemic situation in the second part of 2022, the increase in total staff costs of the surveyed banks moderated, with a slight increase of 1.1 percent in 2022 comparing to the 8.1 percent increase in 2021.

The top 10 surveyed banks showed a 13.2 percent increase in total operating income, combined with a 2.4 percent increase in total operating expenses. The weighted-average cost-to-income ratio of the top 10 banks improved from 49.5 percent in 2021 to 45.2 percent in 2022. 

Bank of Communications (Hong Kong) Limited (BoCom (HK)) and Standard Chartered Bank (Hong Kong) Limited (SCB) recorded the lowest and highest cost-to-income ratios, respectively. ICBC (Asia) and Hang Seng were the only two of the top 10 surveyed banks to record an increase in cost-to-income ratio. ICBC (Asia) increased its cost-to-income ratio from 29.5 percent in 2021 to 30.4 percent in 2022. This increase was mainly attributed to lower total operating income resulting from a 16.0 percent decrease in net fee and commission income and slightly higher operating expenses resulting from a 1.4 percent increase in staff costs and 1.9 percent increase in other administrative expenses⁹. 

Hang Seng increased its cost-to-income ratio from 42.6 percent in 2021 to 43.5 percent in 2022. The increase was mainly attributed to lower total operating income resulting from a 22.9 percent decrease in net fee and commission income and 109.9 percent decrease in net income from financial instruments measured at fair value through profit or loss. The increase in ratio was also contributed by the 4.6 percent increase in other operating expenses, mainly related to the IT-related cost and staff costs¹⁰.

SCB recorded the largest decrease in cost-to-income ratio among the top 10 banks – from 74.3 percent in 2021 to 65.6 percent in 2022, however, it remained the only bank with a cost-to-income ratio exceeding 60 percent. The reduced cost-to-income ratio was attributed to the 8.1 percent growth in operating income, partly offset by a notable decrease of 4.7 percent in operating expenses, which was driven by a sizable decrease in staff costs of 9.7 percent due to the decrease in redundancy costs¹¹.

Loans

Total loans and advances of all surveyed banks decreased modestly by 0.6 percent to HK$10,052 billion at year end 2022, after seeing growth of 6.6 percent in 2021, reflecting lower loan demand amid the uncertain environment. Commercial loans, mortgage lending and loans for use outside Hong Kong continued to make up most of the loans portfolio, representing 89.5 percent of total loans, a slight increase from 88.7 percent in 2021. Loans for use outside Hong Kong and commercial loans continue to be the two largest types of loans. The balance remained relatively flat for all loan products. 

HSBC and Bank of China (Hong Kong) Limited (BOC (HK)) continue to lead the lending market, constituting 49.1 percent of total loans of all surveyed banks as at 31 December 2022. 

Among the top 10 surveyed banks, gross loans and advances decreased by 0.8 percent to HK$8,671 billion, after an increase of 5.7 percent in 2021. Seven out of the top 10 surveyed banks recorded a reduction in their loan portfolio.  

China Construction Bank (Asia) Corporation Limited (CCB (Asia)) experienced the greatest relative contraction in loan balances, from HK$303 billion to HK$274 billion in 2022. The decrease was mainly driven by the contraction of property development lending, transport and transport equipment lending, and trade finance¹².

After experiencing loan contraction in 2019, DBS has grown in the last three years and showed the largest percentage growth in 2022. The gross loans of DBS increased notably from HK$158 billion in 2019 to HK$280 billion in 2022, representing a 77.2 percent increment from 2019. The increase was mainly due to building and construction loan usage in both 2021 and 2022¹³.

HSBC’s gross loans and advances, which cover its Asia Pacific operations, decreased by 3.3 percent to HK$3,745 billion¹⁴. The overall loan balances for HSBC’s Hong Kong operations remained stable with a decrease in trade finance and industrial, commercial and financial lending, partly offset by an increase in residential mortgages. BOC (HK)’s gross loans and advances increased by 3.2 percent to HK$1,656 billion, which was mainly driven by the growth in both property development lending and residential mortgage loans¹⁵.

Impaired loan ratio

Amid the challenging economic environment in 2022 coupled with the fifth wave of Covid and the China property market downturn, the credit quality of the Hong Kong banking sector deteriorated moderately. The impaired loan ratio¹⁶ for all surveyed banks increased from 0.85 percent to 1.36 percent and the impaired loan ratio for the top 10 banks also increased from 0.87 percent to 1.35 percent. 

For the top 10 surveyed banks, BOC (HK) and BoCom (HK) recorded the lowest and highest impaired loan ratio in 2022, respectively. BOC (HK) had the lowest impaired loan ratio of 0.53 percent in 2022, up from 0.27 percent in 2021. The impaired loan ratio of BoCom (HK) increased from 0.11 percent in 2021 to 2.75 percent in 2022, being the largest increase among the top 10 surveyed banks during 2022. The increase was largely driven by the increase in impaired loan in relation to the property development and investment sector¹⁷.

ICBC (Asia) and Nanyang Commercial Bank, Limited (Nanyang) showed an improvement, with their impaired loan ratio reducing by 48 and 31 basis points respectively. These reductions were mainly attributed to several write-offs of impaired assets during 2022.  

In 2022, the Chinese authorities introduced comprehensive policy support, which aimed to stabilise the China property market through mitigating the developers’ liquidity issues, securing the delivery of pre-sold housing projects, and providing support on the demand side. For instance, the “Three-Arrows” policy and the “16-Point Plan” were introduced in the fourth quarter of 2022. Looking ahead, the recovery of the affected property developers will hinge largely on the China property market and the demand for housing. Banks will be under pressure with regards to the increasing impaired loan ratios, so we expect they will focus on managing and downsizing the current exposures, and will also continue to closely monitor the debt servicing ability of the borrowers.

On the retail side, many banks raised their Best Lending Rates three times and by 62.5 basis points in total from September to December 2022¹⁸, which imposed an additional burden on the mortgage payments of borrowers. The aggregate value of residential mortgage loans in negative equity increased to HK$66,252 million in December 2022¹⁹ compared with HK$126 million in December 2021²⁰. These cases were mainly related to bank staff housing loans or residential mortgage loans under the Mortgage Insurance Programme, which generally have a higher loan-to-value ratio. However, the overall mortgage delinquency ratio increased from 0.04 percent in 2021²¹ to 0.06 percent in 2022²² and the risks relating to banks’ residential mortgage loans remained slight.

Going forward, the stabilisation of the pandemic in Hong Kong and the Chinese Mainland should bring favourable impact to the local economy and improve corporates’ fundamentals. A key issue for banks to consider in 2023 is the extent and speed to which demand for housing in China returns and how the financial position of the real estate developers improves. 

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