Commercial property woes weigh on Hong Kong banks

But receding risks in mainland China properties will help offset impact, says Fitch.

The ongoing office and retail property market woes in Hong Kong will weigh on local banks’ asset quality challenges in 2024, says Fitch Ratings.

However, the expected receding risks in the banks’ mainland China property portfolio will help offset impact and drive a modest decline in credit costs.

“We expect the impact on the banks’ asset quality and profitability from strains in the local CRE market to be more muted than in the previous two years when they had to make considerable provisions against their exposures to mainland China’s property sector,” Fitch Ratings said.

Banks are mitigating risks in the commercial real estate (CRE) sector by requesting additional credit enhancements from borrowers, whilst also maintaining conservative loan-to-value (LTV) ratios, the ratings agency said. Fitch estimates that the average LTV ratio is less than 50% for all commercial property-backed loans amongst its rated banks.

“This conservative approach should enable the banks to withstand potential valuation deterioration in collateralised commercial properties this year, limiting the increase in credit costs, in our view,” Fitch said.

As of September 2023, lending to property development and investments made up 15.7% of banks’ total loans, and 5.9% of total assets, according to Fitch. 

Meanwhile, the risk in unsecured loans to developers and landlords will depend on the borrowers’ financial strength and access to alternative cash flows, it added.

“[But] these loans are typically only granted to those with diversified rental income streams that could help them weather a potential downturn in a single CRE segment such as the office market,” Fitch noted.