Hong Kong Banks' Double Trouble

The property market's fragile, and the flow of money into deposits could reverse.

Banks in Hong Kong ought to be worried.

While they may have averted an even bigger crisis, as my colleague Andy Mukherjee argued Monday, they're facing twin threats, with property prices set to drop and the flow of money into deposits looking like it could reverse amid heightened political instability.

Some analysts are predicting home prices could decline by 5 percent after new rules increased the stamp duty to 15 percent for all 1 residential purchases. For banks, that could mean higher capital costs, given that besides mortgages, a lot of individual and commercial lending is also backed by real estate.

Just When the Party (Re)Started

After a sudden drop earlier this year, property prices started rising again, boosting collateral on banks' balance sheets

Source: Bloomberg

The more concerning issue, however, may be on the political front. Deposits in Hong Kong have shown an unmistakable relationship with moves in the yuan against the dollar. China's currency is seen as a proxy to flows in and out of the mainland. As it has tended to drop, coffers in the city have filled.

Water Into a Bucket

A falling yuan has accelerated outflows from China and, coincidently or otherwise, seen coffers fill in Hong Kong

Sources: Bloomberg; HKMA

* Indexed to Aug. 31 for comparability.

The yuan doesn't look set to rise any time soon, so in that sense, the bonanza should continue. But Hong Kong depositors are renowned for being jittery. Whenever there's any hint that Beijing could be getting tougher on its special administrative region, new deposits seem to freeze, or even drop. That happened during the Occupy Central movement in the third quarter of 2014. Anyone worried about a Chinese backlash then would be pacing the cage now.

On Monday, China’s top legislative body ruled that Hong Kong people who advocate independence can't hold public office, a rare intervention designed to prevent two elected "localists" from taking their posts in a case that threatens to spark further unrest. As the city falls further into the embrace of its neighboring giant, those trying to create some distance may feel compelled to travel that little bit further.

If that does turn out to be the case, banks in Hong Kong would have to compete more fiercely for deposits, which usually means paying customers more for their money. That, in turn, could reduce profitability.

Worse, it would come just as Hong Kong looks at adopting even more stringent liquidity risk management rules, making deposits even more valuable.

Lenders' fate is often intertwined with political events. Right now, it looks like Hong Kong could be about to throw a tantrum, and banks certainly won't be immune.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. Except for first-time buyers who are permanent residents. Until now, the highest levy for residents was 8.5 percent, while foreigners already paid a 15 percent stamp duty.

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

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net

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