When HSBC and Standard Chartered report their interim results beginning this week, investors will be closely watching for guidance on the outlook for Hong Kong's economy and whether further strains have emerged in their commercial property portfolios in mainland China.
Standard Chartered will be the first of the city's three currency-issuing banks to update investors on its half-year performance on Friday, followed by HSBC on Monday and Bank of China (Hong Kong) next month.
Even with an improving macroeconomic outlook and better net interest margins, loan growth has been flattish in Hong Kong and fee income could be sluggish in the quarter for banks in Hong Kong.
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"Despite a 20 per cent rebound from the trough on the Hang Seng Index, retail investor sentiment remains weak, impacting investment distribution income," Citigroup analyst Yafei Tian said in a research note.
"Hence we forecast fee income to be broadly flattish quarter on quarter, with soft wealth offset by some improvements in credit card fees."
Key areas to watch will be the expansion of net interest margins on the back of rising interest rates, particularly with accelerated increases by the US Federal Reserve, more provisions related to a deterioration in the Chinese commercial real estate market and a moderation in capital markets and trading, Tian said.
HSBC, the largest of the city's three currency-issuing banks, is expected to report a 21 per cent drop in pre-tax profit to US$3.98 billion in the second quarter from a year earlier, based on consensus analyst forecasts compiled by the bank.
Standard Chartered, which reports on Friday, is seen making a pre-tax profit of US$989 million in the second quarter, according to a consensus compiled by the bank. It made US$1.15 billion a year earlier, driven in part by releases of reserves set aside for potential soured loans during the pandemic.
Both lenders are based in London but generate much of their revenue in Asia and count Hong Kong as their single-largest market.
The results come as Moody's Investors Services warned last week that Hong Kong banks face higher asset risk in their loan portfolios as China's economy continues to slow amid further coronavirus disruptions and financial pressure in the nation's property markets.
A pedestrian walks past a lion guarding HSBC'a main building in Central in April. Photo: AFP alt=A pedestrian walks past a lion guarding HSBC'a main building in Central in April. Photo: AFP>
"The impaired loan ratios for Hong Kong banks' mainland loans will likely further rise this year in light of China's economic slowdown, after increasing more abruptly than overall loan exposures over the six months to March 2022," said Helen Zhang, a Moody's analyst.
China's economic growth slowed to 0.4 per cent in the second quarter, in part as a result of a two-month lockdown in Shanghai to combat the spread of Covid-19.
The nation's property developers are facing further financial pressure as homeowners at more than 300 projects across the mainland are refusing to pay their mortgages in protest over construction delays.
On Friday, China Evergrande Group, one of China's biggest residential developers and the world's most indebted developer, ousted its CEO and financial chief amid an internal inquiry into 13.4 billion yuan (US$1.9 billion) in deposits used as security guarantees for bank loans and later seized by creditors. The Guangzhou-based home builder hopes to unveil a preliminary restructuring plan for its US$300 billion mountain of liabilities later this month.
The debt woes of Evergrande and several other developers have unnerved foreign investors in the past year, particularly given the large role housing plays in the Chinese economy.
HSBC and Standard Chartered, both of which have made big bets on future growth in China, each took US$160 million credit impairments for potential soured loans in their Chinese commercial real estate books in the first quarter amid the worsening outlook for China's economy. They have previously stressed the quality of their mainland property portfolios.
Hang Seng Bank, which is 62.14 per cent owned by HSBC and reports on Monday, and Bank of East Asia, which reports its interim results on August 18, could face higher credit costs in the first quarter because of increased provisions for Chinese commercial real estate, according to Tian, the Citi analyst.
Residents queue up at a Standard Chartered branch in Chai Wan amid the fifth wave of coronavirus outbreak in March. Photo: YikYeung-man alt=Residents queue up at a Standard Chartered branch in Chai Wan amid the fifth wave of coronavirus outbreak in March. Photo: YikYeung-man>
"Unlike onshore loans, offshore loans are often uncollateralised, which could require a higher coverage ratio," she said.
Hang Seng also could face pressure on its first-half income from fees amid sluggish market sentiment and a 4 per cent contraction in the Hong Kong economy in the first quarter, according to Tian.
At the same time, uncertainty over the global economy and the pace of interest rate increases cut into deal making activity and fuelled wild swings in financial markets, which could weigh on the results at HSBC and Standard Chartered.
Second-quarter profit fell 28 per cent at American rival JPMorgan Chase and 47 per cent at Goldman Sachs amid the investor uncertainty.
HSBC is also grappling with how to address a push by Ping An Insurance Group, its largest shareholder, to spin off the lender's Asia business.
Ping An's push has failed to resonate with major investors so far, but HSBC may face pressure to address concerns raised by Ping An, particularly if there are ways to further unlock value in the company. HSBC has hired boutique investment bank Roby Warshaw and Goldman Sachs to help conduct a review.
