Loan growth in Hong Kong appears to have taken a hit in recent months. The scale back in mortgage lending is likely to have been behind the move. The government introduced its seventh, and harshest round of property cooling measures since 2010, in February this year, hiking stamp duties and engaging in macro-prudential tightening. Our view then was that these curbs were unlikely to adversely impact property prices, although we did expect transactional activity to take a hit. Indeed, as seen in the accompanying chart, following the peak in Q312, property transactions gradually declined before collapsing almost 30% month-on-month (m-o-m) in March. This chimes perfectly with mortgage lending activity. Following the knee-jerk reaction to the cooling measures, we expect transactional activity, and consequently mortgage lending, to moderate and gradually begin to recover as buyers digest the news and readjust their expectations.
|Property Curbs Taking Their Toll|
|Hong Kong - Gross Mortgage Lending, HKDmn|
It remains a core view of ours that the spectacular run-up in property prices is likely to be a thing of the past but we believe that while there still remains scope for further upside in Hong Kong's property market, this potential is likely to be capped (see, 'SG/HK Property: Justifiably Expensive', January 22). While this may consequently mean that banking profitability may be impacted going forward, we believe that banking sector revenue streams may be augmented by a new growth spurt within the offshore yuan market. The development of the Qianhai-Hong Kong special economic zone (SEZ) and the special privileges accorded by the central government now allow Hong Kong banks to conduct direct yuan lending with mainland businesses with the SEZ. Also, the development of an interbank offered rate for the offshore yuan (CNH) market by June will further solidify the CNH market infrastructure. Not only will this allow for the creation of a myriad of new banking products, but it will facilitate the creation of hedging options, thereby significantly boosting the attractiveness of the holding the yuan.
Taking the above-mentioned factors into consideration, we hold a relatively constructive view on Hong Kong banks. While the banking sector may face downward pressures from a slower pace of mortgage lending, as well as a general slowdown in overall loan growth as economic momentum wanes, the carving out of new revenues steams via the offshore yuan market is likely to keep profitability well supported.