US tightening buoys Hong Kong banks' profitability

Funding costs are expected to stay low, boosting NIMs.

As the local currency continues to move in tandem with tightening US monetary policy, Hong Kong banks are set for improved net interest margins and enhanced profitability, according to credit rating agency Moody's.

Also read: Banks wage war over fixed deposits as interbank lending rates surge

Even with the slight increase, interest rates should remain accommodative for the rest of the year, and are unlikely to create undue interest repayment burdens on borrowers.

"Large Hong Kong banks have a bigger share of demand and savings deposits in their deposit mixes than their midsize peers, and whilst the yield on their loans and investments rise along with overall market interest rates, their cost of funding should remain low, leading to a widening in their net interest margins," said Moody vice president and senior credit officer Sonny Hsu.

Also read: Heightened Mainland lending pose risks to Hong Kong banks

HKMA chief executive Norman Chan revealed that it will only be a “matter of time” before banks raise deposit and prime rates.

The base rate is set on whichever is higher between the 50 basic points above the lower end of the target range for the US federal funds rate or the average of the five-day moving averages of the overnight and one-month Hong Kong Interbank Offered Rates (HIBORs).

The higher rates may also tame Hong Kong's heated housing market as property prices rose for the 25th consecutive month in April.

Rising rates should make other investments like government and corporate bonds more attractive in light of the steady decline in rental yields in the past years.

“They [banks] are also unlikely to incur material losses on their direct mortgage exposures even in the event of a 20% - 30% drop in housing prices, as they have underwritten residential mortgages with conservative loan-to-value ratios,” the credit rating agency explained.