Part I – Hong Kong
Hong Kong listed banks1
- Hong Kong listed banks which have announced results earned a total of HKD 78 billion in net profit after tax in 2009, up 18.4% over 2008. Excluding impairment charges or write-backs on investments for both years, profit before tax actually fell by about 10% as net interest income contracted.
- Net interest income fell 11% due to narrowing margins despite the 6.3% loan growth.
- Net fee and commission income rose 1.6%, with a pick-up in credit card and loan related fee income.
- Those listed banks which sold Lehman Brothers minibonds to their customers reached an agreement with the regulators to repurchase them from eligible customers. Based on available information, the banks have charged approximately HKD 4–5 billion2 in the 2009 accounts. The ultimate loss to the banks will depend on the amount they can recover from the collaterals underlying the minibonds.
- Impairment charges on investments were much lower than in 2008 as most banks have either disposed of or fully written down their problem investments, with a few banks seeing some write-backs. The aggregated charge for 2009 was at least HKD 200 million2, compared with at least HKD 24.8 billion2 in 2008.
- The impaired loan ratio fell to 0.91% at the end of 2009 from 1.05% at the end of June 2009, though this was still higher than the 0.81% at the end of 2008. Net loan impairment charges were at a similar level as in 2008.
- Capital adequacy remained strong and liquidity remained ample with liquidity ratios generally staying above 40%.
HONG KONG ECONOMIC ENVIRONMENT
- Real GDP contracted by 2.7% in 2009 with declines in private consumption, investment, exports and imports. Government spending on the other hand expanded by 2.1%. Though the real GDP growth in 2009 was the weakest performance since 1998, there were signs of economic recovery in the second half of 2009. Real GDP expanded by 2.6% year-on-year in the fourth quarter of 2009, the first growth recorded since the third quarter of 2008. A combination of low interest rates and various government stimulus/rescue plans helped the global and domestic economy to recover.
- Domestic, office and retail properties surged 28%, 25% and 31% year-on-year respectively in December 2009. The rental market was also catching up, with domestic and retail rentals rising 12.3% and 5.7% year-on-year respectively in December 2009. On the other hand, office rental prices were still struggling, and fell 10.7% year-on-year in December 2009 as more offices moved out of higher-rent buildings in the central business district to other districts. The property market boom has continued in early 2010.
- Fund raising was quiet between August 2008 and April 2009. IPO appetite picked up in the second quarter of 2009 and prospered in the last two quarters of the year. About 93% of the funds raised in 2009 took place in the second half of the year. Total funds raised in 2009 rose 271% over 2008. The Hang Seng Index rebounded from 14,388 at the end of 2008 to 21,873 at the end of 2009. The stock trading volume however did not follow suit and fell by 12.3% over 2008. Stock turnover rebounded in the second quarter of 2009 but went back to a declining trend in the subsequent quarters.
- The inflation rate for 2009 was 0.5%. There was deflation in a number of months in mid 2009, but the consumer price index rose again in September 2009 and reached 2.8% in February 2010. As these are still the early stages of economic recovery, both at a local and global level, the strong supply capacity should help ease the pressure on both costs and prices.
- In terms of value, retail sales climbed 0.6%, but fell 0.8% in terms of volume.
- The three-month period unemployment rate came down from 5.4% in mid 2009 to 4.9% in December 2009 and improved further to 4.6% in February 2010. Bankruptcy petitions filed in the second half of 2009 fell to 6,600 cases from 9,100 cases filed in the first half of 2009. The figures have continued to come down in early 2010.
HONG KONG BANKING ENVIRONMENT
- The US Federal Reserve cut its target interest rate and has kept it at almost zero since December 2008. Commercial banks in Hong Kong cut their prime rate to 5%–5.25% and trimmed the Hong Kong dollar savings deposit rate to 0.01% in late 2008. Interbank interest rates stayed low throughout 2009 as liquidity was abundant. The monthly average overnight HIBOR stayed at 0.13% throughout the year while the monthly average 12-month HIBOR came down from 1.67% in January 2009 to 0.43% in December 2009. 12-month HIBOR fell below 1% since July 2009 and stayed below 0.5% in the first quarter of 2010.
- Net interest margin (NIM) for 2009 narrowed to 1.48%, from 1.84% a year ago. NIM fell in each quarter of 2009 and reached a record low of below 1.4% in the last quarter of the year. Deposit spreads declined as a low interest rate regime offered little room for the reduction of interest rates paid to customers. The interest margin on HIBOR-based lending continued to narrow. The mortgage battle intensified as the residential property market became active from the second quarter of 2009.
- Authorised institutions in Hong Kong saw a rise in loans and advances to HKD 3.29 trillion by the end of 2009, a 2.7% increase over the second half of 2009 or a 0.1% year-on-year increase. Loan growth in the second half of 2009 was broad-based, with loans for use outside Hong Kong, trade finance, mortgages and unsecured personal lending growing by 10.6%, 7.1%, 5.6% and 5.3% respectively. On the other hand, commercial loans shrank by 2.3%, mainly due to a fall in lending to stockbrokers and financial concerns.
- The asset quality of retail banks improved slightly in the second half of 2009. The gross classified ratio declined to 1.35% in December 2009 from 1.51% in June 2009, though this was still higher than the 1.24% recorded in December 2008. Bad debt charges represented 0.10% of the total average assets for retail banks in 2009, lower than the 0.18% recorded in 2008. As for the retail portfolio, unsecured lending delinquency improved in the second half of 2009. The credit card charge off ratio fell to 3.10% in the fourth quarter of 2009, from 4.61% in the second quarter of 2009. The mortgage portfolio remained healthy, with the three-month delinquency ratio reaching a very low level of 0.03% in December 2009, down from 0.05% a year ago.
HONG KONG LISTED BANKS' PERFORMANCE
- The listed banks grew their balance sheets and customer deposits by 4.1% and 11.2% respectively. Given time-deposit interest rates remained near zero, the proportion of time deposits fell to 35% at the 2009 year end, from 48% a year ago. Loan books grew by 6.3%; 88% of the loan growth took place in the second half of 2009.
- Loan growth was supported by a 6.4% growth in mortgage books, 4.5% growth in commercial loans, and 11.6% surge in loans for use outside Hong Kong. Trade finance loans on the other hand fell 10.6%. In the first half of 2009, commercial loans saw strong growth, with about 90% of the year-on-year growth taking place in this period. Trade finance loans on the other hand took a dive. In the second half of 2009, mortgage books and loans for use outside Hong Kong grew significantly, with about 70% and 90% of the year-on-year growth actually taking place in this period respectively.
- Average capital adequacy remained strong under Basel II at 16.0%, compared to 14.1% at the end of December 2008.
- Liquidity in the interbank market remained strong. The majority of listed banks saw an increase in the average liquidity ratio for 2009. Based on disclosed information, all the average liquidity ratios for 2009 were at least 40%, which was still well above the regulatory minimum of 25%.
- Overall net profit for listed banks rose 18.4%. Although net interest income fell 11.0% in the low interest rate environment, total operating income still recorded a 9.7% growth on the back of smaller investment write-downs. Excluding investment write-downs in both years, total operating income actually fell by 4.1%.
- Net interest income was still the main income source, accounting for 56% of total operating income in 2009, compared with 69% in 2008 where non-interest income suffered from investment write-downs.
- Contributions from deposits and net free funds were impacted by the low interest rates. Net interest margin narrowed as deposit spreads markedly reduced, as already near zero rates offered little room to reduce interest rates paid to customers. Treasury balance sheet management income was also hit by the repricing of assets.
- Non-interest income rose 56% mainly due to lower investment write-downs. Excluding the effect of investment write-downs for both years, non-interest income increased by 6.4%.
- Disclosed investment write-downs (including equity) were only HKD 200 million, compared to at least HKD 24.8 billion in 2008 and a few banks saw some write-backs of previous provisions. However, not all banks disclosed this and the net carrying value of the impaired investment portfolio was reduced from around HKD 13.5 billion to around HKD 2 billion.
- Operating expenses rose 7.0% mainly due to the charges on the repurchase of Lehman Brothers related structured products.
- Operating profit before loan impairment allowances rose 12.3%. As the credit environment gradually improved in the second half of 2009, the loan impairment charges in the second half were lower than that in the first half. Overall, the impairment charges on loans for 2009 rose 0.2% over last year.
- We saw fair value gains on properties as property prices picked up in 2009. Contributions from associates and jointly controlled entities went up by 12.7% to HKD 8.5 billion. Most of these were contributions from mainland associated banks. Overall, profit before tax rose by 17.7%.
- Gross impaired loans fell by 9.0% over the second half of 2009 to HKD 25.3 billion as the local economy began to improve. The impaired loan ratio fell to 0.91%, from 1.05% at the end of June 2009.
- Net individually assessed charges rose 9.2% while net collectively assessed charges fell 7.2%. Credit card charge-offs rose in response to higher card spending and uncertainty over the future of the economy. Following the economic downturn, cardholders' debt servicing capability deteriorated. Overall, the net loan impairment charges were about the same as in 2008. Excluding HSBC which has more regional exposures, the net loan impairment charges actually fell by 18.8%.
- The allowance coverage for impaired loans rose to 47% at the end of 2009, compared with 43% at the end of 2008. Impaired loans are not 100% provided as they are made after taking into account collateral values and other expected recoveries.
- Toxic financial assets are no longer a threat to future profitability as they have either been disposed of or fully written down. The net carrying value of the impaired investment portfolio at the end of 2009 was at least HKD 2 billion, down from at least HKD 13.5 billion at the end of 2008. Whether the banks can recoup some of the investment losses in the future will depend on the recovery of the global credit market.
Part II – Mainland China3
Mainland China listed banks
- Mainland listed banks which have announced results registered an 16.8% increase in net profit to RMB 409 billion for 2009 despite a narrowing interest spread. Lower impairment charges on investment and loans, as well as growth in net fee and commission income, contributed to the profit growth.
- Net interest income fell 4.2% on the back of narrowing interest spread, despite strong growth in loans.
- Net fee and commission income rose 21% and the growth was broad-based, with consultancy, advisory and investment banking services recording the strongest growth.
- Impairment write-downs on investments fell to RMB 0.9 billion as compared with RMB 62 billion recorded in the previous year as the foreign debt securities market has stabilised. At the same time, mainland banks have also reduced their holdings in foreign currency debt securities.
- Operating expenses rose by 8.7 % as banks invested to support business growth.
- The non-performing loan (NPL) ratio fell to 1.39% at the end of 2009 from 2.11% at the end of 2008 due to loan growth as well as a decline in NPL balances. The ratio of loan allowances to NPLs reached 169%, up from 133% a year ago. Impairment charges on loans fell by 31% as net individual charges decreased.
- All listed banks were well capitalised with their capital adequacy ratios (CAR) above the minimum ratio of 8%, though the average CAR fell to 11.5% at the end of 2009 due to a strong loan growth of 33%.
MAINLAND CHINA ECONOMIC ENVIRONMENT
- Mainland China's economy expanded by 8.7% in 2009, mainly due to the boost in infrastructure investment from the government's stimulus package and a more active property market. Public and private consumption was strong while net exports were a drag on GDP growth as the external demand for China export was weak.
- The consumer price index rose by 1.9% year-on-year in December 2009. Inflation returned in November, after nine consecutive months of deflation between February and October, due to rising food costs and the effects of policy stimulus plans.
- Retail sales were strong, growing 16.9% year-on-year despite the weak job market in early 2009. Private consumption was boosted by deflation and a number of fiscal incentives for consumer purchases, including government subsidies and tax breaks for home appliances and cars.
- During the year, house prices in many areas of China surged due to a loose credit environment, with property prices in 70 large cities rising 7.8% year-on-year in December. The recovery in house prices went hand in hand with growth in property development, with new residential floor space growing at a record high of 20.8% year-on-year.
- The stock market prospered in 2009 on the back of the strong economy, ample liquidity and increased earnings in listed companies. IPO activity, which had been halted in September 2008, resumed in late June 2009. ChiNext, China's first Nasdaq-style stock market, was launched in October 2009. Total funds raised in the stock markets through IPO, private placements and convertible bonds increased by 66% compared with 2008. The stock trading volume in 2009 doubled versus 2008 while the Shanghai and Shenzhen A-share indices rose 80% and 117% respectively to 3,438 and 1,261 at the end of December 2009.
- The RMB exchange rate remained stable in 2009. During the year, it appreciated by 0.09% and 2.53% against the US dollar and Japanese Yen, and depreciated by 1.41% against the Euro.
MAINLAND CHINA BANKING ENVIRONMENT
- The Renminbi reserve ratios remained unchanged in 2009. Since late September 2008, the PBOC applied different reserve ratios for the bigger and smaller banks. The reserve ratio for small and medium-sized banks was 13.5% while that for the larger banks was 2% higher at 15.5%. In the first quarter of 2010, the PBOC has hiked the Renminbi reserve ratios twice, altogether by one percentage point, to reduce the amount of money available for banks to lend.
- After the PBOC lowered the benchmark lending and deposit interest rates five times in the last four months of 2008, the rates remained unchanged in 2009. The PBOC has also relaxed the minimum limit for floating interest rates for residential mortgage loans. As benchmark lending rates were cut more than benchmark deposit rates (particularly the savings deposit rate), net interest spread came down in 2009.
- Total Renminbi and foreign currency deposits rose by 28% to RMB 61.2 billion at the end of 2009. The deposit growth was broad-based across individuals and corporates. Liquidity remained ample. At the end of 2009, the excess over the required deposit reserve ratio maintained by the financial institutions was 3.13 percentage points, of which the big four state-owned commercial banks and shareholding commercial banks had excesses of 1.72 percentage points and 3.13 percentage points respectively.
- Total Renminbi and foreign currency loans grew by 33% to RMB 42.6 trillion at the end of 2009 on the back of the government's stimulus plans. Personal loans surged by 43% to RMB 8.2 trillion, supported by strong growth in mortgage loans as a result of an active property market. Corporate loans, including discounted bills, grew by 31% to RMB 34.4 trillion. The growth was mainly in medium and long-term loans, and new loans were primarily granted to infrastructure, leasing, commercial services, real estate and manufacturing industries. Discounted bills grew by 24% to RMB 2.39 trillion. These rose strongly over the first half of 2009 to reach RMB 3.64 trillion in June 2009, and then began to come down in the second half of the year.
- The non-performing loan (NPL) ratio of commercial banks improved to 1.58% at the end of 2009, from 2.45% a year ago, due to both rapid loan growth as well as a 12.5% decline in NPL balances over the year. Despite the general improvement in loan quality, there were signs of deterioration in credit card loan quality. The six-month delinquency rate for credit cards rose to 3.1% at the end of 2009, up one percentage point from 2008. Commercial banks continued to set aside allowances for loan losses. The ratio of total allowances to NPLs reached 155.02% at the end of 2009, up from 116.4% a year ago.
MAINLAND CHINA LISTED BANKS' PERFORMANCE
- The mainland listed banks which have announced results achieved balance sheet and loan growth of 25% and 33% year-on-year to reach RMB 40.2 trillion and RMB 21.1 trillion respectively. Corporate loans, personal loans and discounted bills grew by 32%, 42% and 17.6% respectively. 73% of the loan growth took place in the first half of 2009 due to the government's economic stimulus package.
- Personal loans accounted for 22% of the total loans. Mortgage books grew strongly by 45% while credit card loans grew by 57%. Credit cards now account for 0.95% of total loans. Property related lending (which includes corporate loans to the real estate sector and personal mortgage loans) accounts for 24.4% of the total loans, compared with 23.6% a year ago.
- Customer deposits rose by 25% to RMB 31.8 trillion. Savings deposits accounted for 51% of total deposits, compared with 48% at the end of 2008. The loan to deposit ratio improved to 66% at the end of 2009, up from 62% a year ago.
- Listed banks which have announced results were active in raising funds to support their balance sheet growth. About RMB 211 billion was raised through private placements and subordinated debt in 2009, compared with RMB 60 billion in 2008. The listed banks were still well capitalised as they had all achieved the minimum CAR standard of 8%. The average CAR of all listed banks fell to 11.5% at the end of 2009 from 12.4% a year ago, as loan growth put pressure on capital ratios.
- The mainland listed banks which have announced results continued to post strong results, with net profit after tax rising by 16.8% to RMB 409 billion. Strong loan growth partly offset the narrowing interest spread. Investment write-downs were not as significant in 2009 compared with the year before. Fee income grew and overall operating profit before loan impairment allowances rose by 5.6%.
- The aggregate investment write-downs amounted to RMB 0.9 billion, compared with RMB 62 billion in 2008, as the global debt market stablised. A few listed banks saw write-backs in impairment provisions on investments.
- Net interest income fell by 4.2% to RMB 820 billion. Based on disclosed information, the average net interest margin came down to 2.25% for 2009, from 2.98% in 2008 and 2.30% in the first half of 2009.
- Net fee and commission income rose 21% to RMB 177 billion. Bank card fees rose 27% as the number of cards continued to grow. Credit facility fees increased 26% due to strong loan growth. Consultancy, advisory and investment banking fees surged 56% due to the expansion of investment banking and financial advisory services. Agency services fees also grew by 18%, thanks to the recovery of the domestic capital market.
- Operating expenses rose 8.7% to RMB 433 billion, in which staff costs rose by 11.4% while premises and equipment related expenses rose about 14%. The cost to income ratio was 42% for 2009, slightly higher than 41% in 2008.
- Loan impairment charges fell by 31% to RMB 85 billion as overall loan quality continued to improve. Net individually assessed charges fell by 83%. Net collective charges rose 1.1% as banks continued to set aside adequate provisions to match loan growth.
- The NPL coverage ratio, measured by total loan allowances to NPL, reached 169% at the end of 2009, up from 133% at the end of 2008. The improvement in the NPL coverage ratio was seen across all listed banks which have announced results.
- The NPL ratio continued to improve on the back of loan growth and lower gross NPLs, dropping to 1.39% from 1.53% at the end of June 2009 and 2.11% at the end of 2008. All listed banks had an NPL ratio of less than 2% at the end of 2009. Gross NPLs also fell by 12.4%, mainly at the bigger banks, while the smaller banks started to see a pick up in gross NPLs. Special mention loans, another indicator for loan quality, also decreased 9.3% and the improvement was seen across all listed banks which have announced results.
- Overall loan write-off fell 16.2%, with a mixed trend across listed banks.
- The bigger banks continued to reduce their holdings in foreign currency debt securities. Based on disclosed information, the remaining net book value of the impaired investment portfolio was reduced to at least RMB 48 billion, compared with at least RMB 93 billion a year ago.
Commenting on the Hong Kong listed banks' results, Martin Wardle, partner in charge of KPMG's Financial Services practice in Hong Kong, said:
"Despite a challenging operating environment with real GDP contracting by 2.7% in 2009, Hong Kong listed banks which have announced results still saw a growth of 18.4% in net profit after tax to HKD 78 billion. Net interest income fell by 11.0% on the back of narrowing margins in a sustained low interest rate environment. Net fee and commission income rose by 1.6%. A substantial decrease in investment write-downs offset the decline in net interest income, causing total operating income to increase by 9.7%. The performance of individual listed banks was mixed, with six banks doubling their net profit mainly due to lower investment write-downs, and another five banks seeing a decline in net profit.
In July 2009, banks that had sold minibonds, a structured product arranged by Lehman Brothers whose value and recoverability were impacted by the firm's bankruptcy, reached an agreement with the regulators on the repurchase of these minibonds from eligible customers. Based on disclosed information, the listed banks have charged at least HKD 4 billion in their 2009 accounts. Whether further provisions may be required or whether the banks can recover any of these losses will depend on the amount that each bank has ascribed to the value of underlying collaterals and the amount which can be recovered."
Simon Donowho, a partner in KPMG's Financial Services practice, commented:
"The economic downturn which started when the global financial crisis hit in 2008 led to some corporate failures as well as personal bankruptcies, particularly in the first half of 2009. Although the net loan impairment charges for 2009 were about the same as the prior year, the overall loan quality has yet to catch up. The impaired loan ratio rose from 0.84% at the end of 2008 to 1.05% at the end of June 2009, and then improved to 0.91% at the end of 2009 when the economy began to recover in the second half of 2009. Past due but not impaired loans have also decreased. As the speculative activities have regained momentum in the market, especially in the property sector, lenders should remain cautious in granting property loans. They are also required to follow the HKMA's guidance to adopt prudent pricing strategies for mortgages.
The full deposit guarantee offered by the government in October 2008 as a temporary measure to restore confidence following the global financial crisis will expire at the end of 2010. Recently, the Deposit Protection Board proposed raising the bank deposit protection limit to HKD 500,000 from HKD 100,000 upon the expiry of the government guarantee. The Legislative Council will start discussing this on 21 April and, if approved by lawmakers, the new limit will be effective from 1 January 2011. Banking practices around product sales, remuneration schemes and communication with customers have been enhanced recently. Lenders are reminded to keep their depositors well aware of the expiry of the full guarantee."
Commenting on the Mainland listed banks' results, Joan Ho, partner in charge of KPMG's Financial Services practice in southern China, said:
"Those mainland China listed banks which have announced results achieved a 16.8% increase in net profit after tax to RMB 409 billion. A reduction in the interest rate towards the last quarter of 2008 put significant pressure on the interest margin, while the strong loan growth partly offset this effect. Net interest income fell 4.2%.
Non-interest income grew 88% thanks to fee income growth as well as substantially lower investment write-downs. Fee income growth was broad-based, supported by loan growth, a pick-up in the domestic capital market, and on-going business expansion.
Write-downs on impaired investments for listed banks were much smaller as the global credit market stablised in 2009, with a few banks writing back some of the previous provisions. Based on disclosed information, listed banks which have announced results wrote down investments by at least RMB 0.9 billion in 2009, compared with at least RMB 62 billion in 2008. The net carrying value of impaired investments was at least RMB 48 billion at the end 2009. The recovery of the global economy as well as the credit market will determine whether some of these impaired assets can be recovered or not." Ivan Li, a partner in KPMG's Financial Services practice, commented:
"The NPL ratio for mainland listed banks which have announced results came down to 1.39% at the end of 2009 from 2.11% a year ago. While the NPL ratio remained low, a few smaller banks began to see an uptick in their NPL balances. Rapid loan growth of 33% in just one year posed challenges to listed banks in terms of overall risk management. They needed to ensure that sufficient resources were allocated for credit monitoring, and that funds were not channelled into speculative activities. As there is growing concern over an asset bubble, particularly in the property sector, banks should closely monitor their exposure to this sector and tighten their lending policies where necessary.
Listed banks continued to build up their loan provisions to match the growth in loan books. The average loan provision to NPL ratio reached 169% at the end of 2009, up from 133% at the end of 2008.
Fund raising was active in 2009 across listed banks which aimed to shore up their capital after the domestic credit boom. About RMB 211 billion was raised through private placements and the sale of subordinated debt in 2009. Moving into the first four months of 2010, a number of listed banks have raised funds or plan to raise funds via rights issues, private placements or selling convertible bonds or subordinated debt. Based on disclosed plans, total funds raised and to be raised by listed banks which have announced results exceed RMB 215 billion. The average CAR of listed banks was still strong at 11.5% at the end of 2009, down from 12.4% a year ago."
- Ends -
1. The 12 Hong Kong banks included in our analysis are BOC Hong Kong (Holdings), The Bank of East Asia, Chong Hing Bank, Dah Sing Banking Group, Fubon Bank (Hong Kong), Hang Seng Bank, Hongkong and Shanghai Banking Corporation, ICBC (Asia), Public Financial Holdings, Standard Chartered Bank (Hong Kong), Wing Hang Bank and Wing Lung Bank.
2. Disclosed information refers to results announcements and media reports.
3. The 11 mainland banks included in our analysis are: Bank of China, China Construction Bank, Bank of Communications, China Merchants Bank, and Industrial & Commercial Bank of China which are listed on both the Shanghai and Hong Kong stock exchanges, and Bank of Nanjing, Bank of Ningbo, Huaxia Bank, Industrial Bank, Shanghai Pudong Development Bank and Shenzhen Development Bank which are listed on the Shanghai or Shenzhen stock exchanges.
KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 146 countries and have 140,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International") a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.
KPMG China has 12 offices (including KPMG Advisory (China) Limited) in Beijing, Shenyang, Qingdao, Shanghai, Nanjing, Chengdu, Hangzhou, Guangzhou, Fuzhou, Shenzhen, Hong Kong and Macau, with more than 9,000 professionals.