Hong Kong banks hoard record piles of cash as economy sputters

HONG KONG - Hong Kong banks are hoarding cash and liquidity despite calls by the government to help out struggling small businesses with funding to reignite the city’s ailing economy.

Banks in the city, including HSBC Holdings and Standard Chartered, held an aggregate liquidity coverage ratio (LCR) of more than 180 per cent in the second quarter, the highest ever and almost double the 100 per cent requirement.

The ratio – which gauges liquid assets held to meet short-term obligations – eased slightly to 178.4 per cent in September, according to the latest data from the Hong Kong Monetary Authority (HKMA).

The cash hoard has raised concerns with regulators, as the economy struggles to regain traction after the Covid-19 pandemic years and political upheaval.

The government, along with local banks, in August set up a task force to unleash small business funding and said it would “monitor” the business strategies of lenders. On their end, banks say the cash positions are prudent given the sluggish economy and property downturn and that demand for loans is subdued after years of rising interest rates.

Hong Kong’s currency is pegged to the US dollar, and its monetary policy follows the US central bank, which until 2024 had been raising rates.

“Businesses are struggling a lot, a lot are struggling to get finance,” said Mr Benjamin Quinlan, the chief executive of consulting firm Quinlan & Associates. “The economic profile of Hong Kong is not great. SMEs are critical to this city. Lending levels have been stagnant for the past five to six years.”

The 16 participating banks have set aside about HK$370 billion (S$65 billion) in funds dedicated to small and medium-sized enterprises (SMEs), according to a spokesperson for the regulator. 

In each of the first three quarters of 2024, banks provided less than HK$300 billion in loans to the city’s wholesale and retail companies – a loose proxy for SMEs. That is down from as much as HK$500 billion a quarter in 2014.     

Hang Seng Bank, which is controlled by HSBC, has the highest LCR by far among major lenders, clocking in above 300 per cent. The lender has been hit hard by the city’s real estate slump, with impaired commercial real estate loans surging 12-fold in the first half of 2024, according to Bloomberg Intelligence. 

It is “more costly” for banks to underwrite loans to SMEs and the risks of lending outweigh the returns, according to Mr Francis Chan, analyst at Bloomberg Intelligence. 

Other lenders with high ratios include Bank of East Asia at 247 per cent as at September 2024 and Bank of China (Hong Kong) at 231.8 per cent. 

A Bank of East Asia spokesman said the lender has been supportive of SMEs as it consistently keeps its LCR above regulatory requirements.  

HSBC does not publicly disclose the figure for its Hong Kong unit. A bank spokesman said historically, its liquidity metrics have been “well above” the regulatory minimum, and the bank’s strong position enables it to continue to support customers.

StanChart is dedicated to meeting clients’ financing needs, while its LCR reflects a prudent approach to liquidity management, according to a spokeswoman. Hong Kong remained its largest financing market, and loans and advances to customers in the city showed mild year-on-year growth during the third quarter of 2024, she said. 

Property downturn 

The excess liquidity is also due to the

property downturn in China

and Hong Kong commercial real estate. Many banks have “trimmed down” their exposure to both, which were a “key part” of their corporate lending, according to Mr Chan. 

HSBC, the biggest lender in the city, cut total China real estate exposure to US$9.4 billion (S$12.8 billion) as at the second quarter of 2024, down from US$21.3 billion in the fourth quarter of 2021.

Some of that exposure was booked in Hong Kong. It also posted US$100 million of loan loss provisions for Hong Kong commercial real estate during the third quarter. 

Its subsidiary Hang Seng Bank saw its credit-impaired gross loans and advances to Hong Kong commercial real estate customers jump to HK$13.5 billion in the first half of 2024, from HK$1.1 billion at the end of 2023.

Rival StanChart reduced its exposure to China commercial real estate to US$2 billion as at September 2024, down by over 50 per cent since the end of 2021. Its commercial real estate risks are limited, a spokesperson said. 

Loans and advances to customers made up around 35 per cent of banks’ overall assets in November, down from around 41 per cent in Nov 2021, representing a drop of about HK$1.11 trillion, according to HKMA data.

“It’s pretty much a macro story that loan growth has been rather weak,” said Mr Gary Ng, senior economist at Natixis, adding that there has been a “sharp decline” in loans in Hong Kong in the last three years, with the real estate downturn and people borrowing less for mortgages while companies are less optimistic. BLOOMBERG