Norman Chan: Expectations for loan, deposit growth too optimistic

The Hong Kong Monetary Authority (HKMA) Chief Executive Norman Chan said on Monday that the expectations of the city's banks towards loan and deposit growth were "aggressive".

"For some banks, the assumptions for their deposit and loan business growth may be quite aggressive," Chan told a meeting of the Legislative Council's financial affairs panel. "We are talking to them to see if they need to slow the growth in their loan business."

The HKMA sent circulars to banks operating in the city back in the middle of April, asking them to submit their business plans and funding strategies for the remaining period of 2011. This was due to the fact that robust credit growth, particularly mortgage loans, has made the HKMA worried about the risks of a credit-fueled property bubble. Banks submitted their documents to the HKMA by the April 30 deadline.

And according to the HKMA's figures, Hong Kong dollar lending has been growing faster than deposits, pushing the local currency loan-to-deposit ratio for the city's lenders to 81.7 percent at the end of March from 71.2 percent in early 2010.

The surge in the local banks' loans-to-deposits ratio has emerged amid a background of strong credit loan annual growth of 28.6 percent to HK$940 billion in 2010. In the first quarter of 2011, credit demand then registered another annual growth rate in the city of 29.6 percent.

"The system's loan-to-deposit ratio of 81.7 percent is not worrying in itself, however among smaller banks the HK-dollar-LDR (loan-to-deposit ratio) is in some cases now above 90 percent," Tom Quarmby, Barclays Capitals's analyst for regional banks, told Bloomberg News.

HKMA's Chan, meanwhile, emphasized that his organization will continue to ensure that local banks exercise prudent risk management with special attention to the local mortgage loan business so as to safeguard the stability of the local banking system.

"I am aware that more non-local residents are using their income streams or assets outside Hong Kong as financial criteria to apply for residential mortgage loans from local banks. I am sure that local banks will exercise more prudent risk management towards non-local residents' mortgage loan applications," Chan said.

Chan also warned again that the current interest rate risk for local home buyers and investors is more noticeable as the current interest rate environment is very different from that in 1997.

"The current mortgage rate in the city is hovering below 1 percent, compared to the 10 percent or more mortgage rates in 1997. Therefore, the interest rate trend in the near future will be more on the upward side," Chan said.

"I urge local home buyers and investors to manage interest rate risks properly and avoid financial over-stretching," Chan added.

Major local mortgage loan providers, including HSBC, Standard and Chartered Bank (Hong Kong) and BOCHK (Holdings) have started at least two rounds of mortgage loan rate hikes since April due to the rise in capital costs fueled by the hike in inter-bank rates.

Local home prices have advanced nearly 70 percent over the past two years based on the Centa-City Index compiled by Centaline Property Agency. Chan said on Monday that local home prices have already exceeded the high levels recorded in the third quarter of 1997.

China Daily

(HK Edition 05/24/2011 page2)