Banks hoard cash as lending slumps in Hong Kong's shaky economy

In Hong Kong, banks have been accumulating record levels of cash and liquidity despite ongoing pleas from the government to support struggling small businesses facing funding shortages. During the second quarter of 2024, major banks, including HSBC Holdings and Standard Chartered, reported an aggregate liquidity coverage ratio (LCR) of over 180 percent, significantly exceeding the required 100 percent threshold. As of September, this figure remained high at 178.4 percent, demonstrating a conservative approach in an uncertain economic environment. The liquidity coverage ratio measures the ratio of liquid assets banks maintain to meet short-term obligations, indicating a focus on stability amid economic volatility. The financial landscape has been challenging for lenders, characterized by a decline in loan demand linked to prolonged high interest rates and a downturn in the property market. Banks have faced stagnant lending levels over the past five to six years, which has exacerbated the city's economic struggles. In fact, the regulators reported that banks reserved about HK$370 billion for small and medium-sized enterprises (SMEs), yet lending to the wholesale and retail sectors—a proxy for SMEs—amounted to less than HK$300 billion in each of the first three quarters of 2024, significantly down from HK$500 billion per quarter in 2014. The severe impact of the real estate slump has led to a staggering 12-fold increase in impaired commercial real estate loans reported by banks in the first half of 2024. Analysts, including Francis Chan from Bloomberg Intelligence, explain that banks are cautious about lending due to the increasing costs of underwriting such loans, where the associated risks now outweigh potential returns. This prudent behavior reflects a shift in banks’ lending strategies in a declining market. The situation has prompted some banks, like the Bank of East Asia, to maintain an LCR far above regulatory requirements while communicating their support for SMEs. Conversely, major institutions like HSBC have reduced their exposure to real estate, slashing their total China real estate exposure to US$9.4 billion in the second quarter of 2024, down from US$21.3 billion in late 2021. Similarly, Standard Chartered cut its exposure to commercial real estate by over 50 percent during the same period, with limited risks to its overall portfolio. The economic outlook for Hong Kong remains bleak, reflected through a sharp decline in loan growth and lending confidence among businesses and individuals, as noted by economist Gary Ng from Natixis.