Finance

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

Concerned about the bad debt problem in China? Maybe it's time to worry about Hong Kong. Whether because of a spillover from the mainland's troubles or falling property prices at home, the city's soured loans have suddenly spiked.

Earlier this week, Bank of East Asia reported that its nonperforming loans in Hong Kong almost doubled between the end of December and June 30. The lender had already been dealing with an increase in delinquencies in China, where it has the second-largest branch network after HSBC. It's now putting out a similar fire closer to home.

Unhappy Import
After dealing with a spike in nonperforming loans in China, Bank of East Asia now faces the problem at home
Source: Company filings

In its interim results, the bank offered the most detailed breakdown of bad debts among the five Hong Kong-domiciled publicly traded lenders . Nonperforming loans in Hong Kong jumped to HK$1.75 billion ($226 million) from HK$886 million at the end of December. The report showed that residential mortgages and loans to retailers are the ones souring the fastest, though it's unclear how much China has contributed to the deterioration (Hong Kong companies that have borrowed to invest in mainland businesses could be among those coming under stress). BEA Hong Kong's impaired loan ratio rose to 0.49 percent from 0.34 percent at the end of 2015.

Cracked Ceilings
Among the areas that BEA is most exposed, retail and residential mortgage loans saw the worst rise in delinquency
Source: Company filings

The Hong Kong Monetary Authority hasn't noticed any significant increase in residential mortgages turning bad. The three-month delinquency ratio published regularly by the city's de facto central bank remained unchanged at an ultra-low 0.04 percent between February and June. Still, the overall doubtful loan ratio for Hong Kong retail banks almost doubled to 0.41 percent at the end of March from 0.21 percent at the end of June.

That's Not Good
Even as a protracted period of low rates has boosted borrowers' ability to repay, the plunge in Hong Kong's retail sales and home prices may be spurring bad loans
Source: Hong Kong Monetary Authority

The trajectory of bad loans at BEA matches what investors might expect from a territory where residential property prices have dropped from their 2015 peak and retail sales are under pressure. That means two things may be ahead, neither of them very pleasant for shareholders: equity raisings, which imply dilution, and lower profits, which points to reduced dividends.

Granted, doubtful debts at Hong Kong banks remain extremely low. The 0.41 percent is less than a quarter of the mainland's 1.75 percent nonperforming loan ratio as of the end of June (a figure that is widely regarded as understating the true level of soured debts at China's banks). 

Still, it is the pace of deterioration that should set alarm bells ringing. Nonperforming loans have been rising quickly at all the five Hong Kong banks, almost tripling in aggregate since 2011.

Going Sour Fast
Nonperforming loans at Hong Kong's banks have almost tripled since 2011
Source: Bloomberg
Note: Includes Bank of East Asia, Hang Seng Bank, BOC Hong Kong, Dah Sing Bank, Chong Hing Bank.

Again, all lenders are exposed to China to some extent, so part of the problem could be originating there. But BEA's latest report indicates that the mainland can't be seen as the sole cause anymore. It's time for investors to start worrying about Hong Kong itself.

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

(Removes reference to ranking by assets in second paragraph.)

  1. The list doesn't include HSBC, which is domiciled in London.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net