Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

The shares of London-based banks HSBC and Standard Chartered are rallying for the first time following the Fed's move to end its almost decade-long era of near-zero rates. After all, higher rates mean more money from loans, and a reprieve from years of falling net interest margins.

Trending Down
Both banks' 12-month trailing net interest margins are on the decline
Source: Bloomberg

But Hong Kong -- a city of just seven million, and an adult population half that -- could be the undoing of these Asia-focused lenders.

After having its stock hammered to levels not seen since the dot-com bust, StanChart, fresh from an about $5.1 billion rights issue, rallied as much as 9 percent Thursday. HSBC, whose progressive dividend policy has helped it escape such a battering, closed 2 percent higher but remains down 13 percent for the year.

Because of its currency's peg to the U.S. dollar, Hong Kong has to track moves by the Fed, and on Thursday raised the base rate to 0.75 percent from 0.5 percent. Awash with liquidity after a flood of mainland Chinese funds into its banking system after the surprise devaluation of the yuan in August, both HSBC and StanChart kept their Hong Kong rates unchanged -- for now.

Eastern Exposure
Source: Bloomberg

That's all good, but Hong Kong has an inordinate impact on these two lenders. In revenue terms, it's both banks' biggest single market (for HSBC, Hong Kong ties in first place with the U.K.), making up almost one third of their global business, according to Barclays. Some 29 percent of HSBC's revenue comes from Hong Kong and that number's pretty similar for StanChart. In the business of loans, too, Hong Kong reigns. According to Bloomberg Intelligence analyst Francis Chan, about 23 percent of HSBC's lending and 21 percent for StanChart is conducted in the former British colony.

Hong Kong's financial importance, as well as historical roots, are reasons why the city is at the top of HSBC's list of prospective headquarters should it choose to quit the U.K. and British tax regime as part of its ongoing domicile review.

But with huge ties come huge risks, and exposure to Hong Kong, which Goldman Sachs recently downgraded to underweight in its Asia-Pacific portfolio, isn't exactly a sure thing nowadays.

For one, it means close ties to heavyweight neighbor China, whose economy, as everyone knows, is slowing. Hong Kong banks’ loans to the mainland represented almost 16 percent of total assets as at the end of June, a Hong Kong Monetary Authority report showed in September.

But even more damaging, being so big in Hong Kong means exposure to the city's heady real estate market.

Concerns about the impact of rising interest rates have pushed property prices lower in recent months, but they remain firmly in bubble territory: brokerage CBRE says Hong Kong has the world's most-expensive homes in square-foot terms, with London and New York close behind. Even despite the recent slowdown, Hong Kong is second only to Turkey in terms of the biggest home price rises in the past 12 months.

Top Turkey
Home price gains, 12 months to Sept. 30
Source: Knight Frank Global House Price Index, Q3 2015

StanChart doesn't strip out its exposure to real estate loans in the city, but just over half of HSBC's lending last year in Hong Kong was related to the sector.

So it's risky business. If a slew of rate rises hurts real estate prices, as they've done in the past, the relief that HSBC and StanChart might have been hoping for from being able to charge more on their loans may not come to pass.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan in Hong Kong at

To contact the editor responsible for this story:
Katrina Nicholas at