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HSBC’s publicity to defaulted business property loans in Hong Kong surged nearly sixfold to greater than $3bn within the first half of this 12 months, underscoring the dangers the UK financial institution faces from a droop within the Chinese language territory’s actual property market.
Hong Kong is HSBC’s largest marketplace for business actual property lending, accounting for 45 per cent of its publicity, compared with 18 per cent for the UK.
The London-headquartered financial institution had $3.2bn in “credit score impaired” business actual property loans to Hong Kong purchasers as of June 30, up from simply $576mn six months earlier, based on its monetary report for the primary half of this 12 months.
The leap in defaults is an indication of how the business property downturn in Hong Kong, a monetary hub that has for years been one of many world’s most costly actual property markets, has began to hit banks. Prime workplace rents have fallen greater than 35 per cent since 2020, based on business property adviser Cushman & Wakefield.
Whereas banks have been underneath stress for a number of years over their publicity to mainland China’s property market, the main focus is now shifting to Hong Kong, mentioned David Wong, head of North Asia financial institution rankings at Fitch.
“We’re much more comfy saying a line has been drawn underneath [banks’ exposure to] China business actual property, versus Hong Kong,” Wong mentioned. “I don’t suppose we’ve seen the underside but.”
HSBC’s whole international business actual property lending was $79bn as of June. The $3.2bn in “credit score impaired” loans made up 9 per cent of HSBC’s whole Hong Kong business actual property lending.
Beneath the financial institution’s definition, these debtors have breached the phrases of their mortgage. That may embody lacking funds however it may additionally embody “non-financial” measures such because the loan-to-value ratio lacking an agreed goal determine.
Georges Elhedery, who became HSBC’s chief executive in September, mentioned on a name with analysts in early August when he was chief monetary officer that the loans had been “all performing” although “a big quantity” had been classed as credit score impaired.
Nevertheless, the financial institution mentioned “sure debtors have sought fee deferrals to accommodate debt serviceability challenges” in its monetary report for the primary half of this 12 months, printed on July 31.
HSBC informed the Monetary Instances this week that “quite a bit” of the debtors are nonetheless paying curiosity. A spokesperson for the financial institution declined to supply figures on what number of debtors had been paying curiosity or to supply extra element on Elhedery’s remark.
Commonplace Chartered, which as with HSBC has extra publicity to business property lending in Hong Kong than another area, reported an increase within the proportion of lower-rated debtors in its most up-to-date earnings, although it didn’t mark any of the loans as credit score impaired.
The lender has lower its unsecured publicity to Hong Kong business actual property debtors by 19 per cent because the finish of 2022, it mentioned in filings in July. Commonplace Chartered declined to remark.
Greater rates of interest have put Hong Kong debtors underneath stress at a time when demand for workplace and retail house has fallen, with China’s financial slowdown and Beijing’s nationwide safety crackdown hitting worldwide investor confidence. Powerful zero-Covid measures additionally prompted an exodus of overseas staff throughout the pandemic.
The HSBC figures present that Hong Kong teams accounted for 45 per cent of the financial institution’s whole credit-impaired business actual property lending as of June, up from 13 per cent six months earlier.
Elhedery mentioned on the earnings name that the financial institution had taken a “most likely prudent strategy” in reclassifying the loans and was “comfy and assured within the medium-to-long-term outlook” for Hong Kong’s business actual property sector, which might profit from any charge cuts.
The financial institution mentioned in its submitting that its collateral protection was robust and “broadly secure” whilst valuations fell, and it was making “comparatively low” provisions for credit score losses on the loans due to excessive collateralisation.
“I believe for these of us residing in Hong Kong you’ll be able to see emptiness charges are larger at this level,” mentioned Ming Lau, the financial institution’s Asia chief monetary officer, on the analyst name. However he mentioned that the loans had been structured in order that the financial institution had recourse to “different property and money” of the debtors.
Eleven of Hong Kong’s largest property builders have written down the worth of their funding property portfolios by about $23bn since 2020, based on information compiled by UBS for the Monetary Instances.
Mark Leung, a property analyst at UBS, mentioned there could be more writedowns for Hong Kong’s builders within the close to future. “For workplaces, lease most likely will proceed to return down as a result of inflated provide situation, and vacancies might edge up,” he mentioned.
Lots of the territory’s property corporations are managed by tycoons and their households. Solar Hung Kai Properties is managed by the Kwok household, Henderson Land Improvement by the Lee household, CK Asset by the Li household and New World Improvement by the Cheng household.
Gary Ng, a senior economist at Natixis, mentioned that whereas the builders are anticipated to stay underneath stress, most retained “sound monetary positions” and will faucet “previous cash” held by the tycoons and their households.
