Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

If you're a bank earning a return on equity of minus 5 percent, how about finding yourself a lending opportunity that promises no less than 35 percent?

The answer should be obvious, but perhaps not if the bank in question is Standard Chartered, and the opportunity for outsize returns happens to be mortgage lending in Hong Kong.

Off a Slippery Slide
With a return on equity that's collapsed, StanChart's need for profit is the greatest
Source: Bloomberg

Hong Kong is the biggest source of revenue for the emerging-markets lender, and writing checks to people who want to buy homes in the city is a highly profitable business. Morgan Stanley analysts Anil Agarwal and Cassie Sun have done the math: Lenders can borrow at the local interbank rate of 0.2 percent, slap on a 1.5 percent spread, from which they then deduct 0.7 percent for operating expenses, credit costs and tax. That's a return on assets of 0.8 percent, which when leveraged 44 times, generates a return on equity of about 35 percent.

Better than a fourth grader's lemonade stall, but soured by three things.

First, demand for mortgages is weak. Falling home prices are putting off buyers. Second, supply of loans is strong. All banks are jostling for the mortgage business of seven million people because there isn't much else for them to do. Ever since the shock Aug. 11 devaluation in the yuan, mainland Chinese borrowers have given up on the popular ``carry trade," which saw them borrow in U.S. or Hong Kong dollars in the hope of repaying the debt with a stronger yuan. Trade finance, meanwhile, tumbled 19 percent last year because of slumping commodity prices and given the anemic global demand, manufacturing, too, has little use for credit.

Finally, cash is gushing into banks' vaults as deposits, and it has nowhere to go.

Someone Need a Loan? Anyone?
Hong Kong banks are awash with deposits amid weak credit demand
Source: Hong Kong Monetary Authority

All of this means that Hong Kong lenders are perhaps going to lower the spread they charge on mortgage loans. That's goodbye to frothy profits. Morgan Stanley says it now expects net interest margins to decline for all the banks it covers in the city.

While that may be bad news for HSBC and Bank of East Asia et al, it's particularly troublesome for StanChart. The outlook is turning gloomy for Asia's best-performing banking market just as CEO Bill Winters is trying to liquidate $8 billion in problem loans. As the lender tries to extricate itself from Indonesian coal miners and Indian infrastructure companies, every little bit of extra profit would have helped. That 35 percent return on equity was so tantalizing; it's a shame StanChart can't have it.

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

To contact the author of this story:
Andy Mukherjee in Singapore at

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