The local economy will remain challenged in 2021 with a number of downside risk factors to be mitigated
The outbreak of COVID-19 in 2020 hit hard the already vulnerable economy of Hong Kong. The gross domestic product (GDP) growth slumped by 8.9% in the first quarter compared to a year ago, and further contracted by 9% in the second quarter. Although the economy bounced back in the third quarter, Hong Kong authorities estimate that economic growth for 2020 will contract by -8% and will see a mild return to positive growth of 3.5% in 2021 if the vaccines could be widely available soon.
As the economic downturn deepened amid the global outbreak of COVID-19, retail banks in Hong Kong experienced a tough year in 2020. The aggregate pre-tax operating profit of banks declined by 20.0% in the first half of 2020, compared to the same period in 2019. As a result, the return on assets (ROA) dropped to a low of 0.95% in the first half of 2020 compared to 1.27% in 2019. Despite the worsening recession in Hong Kong, total loans and advances of the banking sector grew by 3.0% during the first half of 2020, although asset quality deteriorated. The gross non-performing loan (NPL) ratio increased from 0.57% at the end of 2019 to 0.79% at the end of June 2020. It is expected to further worsen given the borrower’s ability to repay loans has yet to recover.
In terms of capital ratio, the tier 1 capital ratio and capital adequacy ratio (CAR) registered at 18.7% and 20.7%, respectively. These are relatively unchanged compared to end of 2019, indicating a comfortable level of adequacy compared with international standards.
In the latest AB500 ranking, HSBC, Bank of China (Hong Kong), and Standard Chartered Bank (Hong Kong) ranked among the top three by total assets with the overall ranking of 11, 31 and 41, respectively. In terms of profitability, DBS Bank (Hong Kong) had the leading position among the top 10 largest banks with return on equity (ROE) and ROA of 11.6% and 1%, respectively. It was followed by Bank of China (Hong Kong), and Hang Seng Bank. In the near term, the outlook for banks’ profitability may become more challenging as the low interest rate environment is likely to be prolonged, continuing to suppress banks’ net interest margin.
The Hong Kong Monetary Authority (HKMA) and the banking sector have taken proactive measures to reduce cash-flow pressure on borrowers in response to the pandemic. The HKMA has requested banks to uphold their loan classification standards to reflect any changes in asset quality in a timely manner and to set aside adequate provisions. These measures supported stable flows of credit to help the economy ride out this difficult period.
Looking forward to 2021, the Hong Kong economy will continue to be challenged by a number of downside risk factors including uncertainties over the path of global and domestic economic recovery amid the COVID-19 pandemic and rising US-China tensions. Even with the vaccine to be broadly available, Hong Kong’s broken tourism and business environment still need time to recover.