The Monetary Authority's Yuang Guoheng expects that Hong Kong's P will be difficult to reduce further. If the U.S. lowers interest rates within the year, mortgage borrowers are unlikely to benefit, only corporate Hibor loans may see a reduction

The Federal Reserve will announce its first interest rate decision of the year at 12:00 AM Hong Kong time this Thursday (29th). The market generally expects that U.S. interest rates will remain unchanged, with a possibility of 2 to 3 rate cuts throughout the year. The Vice President of the Hong Kong Monetary Authority, Yu Guoheng, pointed out that the net interest margin of local retail banks has fallen to a very low level, and the savings deposit interest rate has dropped to near zero. If banks further reduce the prime rate (P), it may put additional pressure on the net interest margin, affecting their defensive capabilities. This implies that there is little room for further reductions in the prime rate in Hong Kong. However, he believes that if the U.S. cuts interest rates, the Hong Kong Interbank Offered Rate (Hibor) will also decline, benefiting most corporate borrowers. Hong Kong Retail Banks' Net Interest Margin Continues to Be Under Pressure In December last year, the Federal Reserve cut interest rates again, but local banks did not follow suit and kept the prime rate unchanged, which was expected. However, there are still many voices questioning why banks do not reduce the prime rate. In response, Yu Guoheng actively stated that starting from September 2024, the U.S. will enter a rate-cutting cycle, and the net interest margin of local retail banks will continue to be under pressure. In the first three quarters of last year, the net interest margin narrowed by 3 basis points year-on-year to 1.47%, which is considered very low internationally. For example, in the U.S., the net interest margin of the banking industry is above 2%, while other major markets generally have a margin of 1.8% to 2%. "I Also Want Banks to Be Safe and Stable" If the basic business model of banks "relies on NIM (net interest margin) and net interest income," continuing to reduce the prime rate, in a situation where the savings deposit interest rate can no longer be lowered, will definitely narrow the net interest margin, or affect the banks' profitability, weakening their defensive capabilities. He said, "As a risk assessment, I also do not want banks to further squeeze the NIM, because from a regulatory perspective, I also want banks to be safe and stable," otherwise it would pose challenges to the banks' risk management. He pointed out that in this round of rate-cutting cycle, the prime rate of major banks in Hong Kong has been cumulatively reduced by 0.875 basis points, offsetting the previous rate hike cycle's increase, and returning to the level of 2021, thus limiting further reduction space. Currently, the market expects the Federal Reserve to cut rates within the year. He believes that even if the prime rate remains unchanged, a considerable portion of loans in Hong Kong that are based on Hibor can benefit, as under the linked exchange rate system, Hibor should follow U.S. interest rates downward, which will help alleviate the repayment pressure on borrowers and have a positive effect on economic activity. Nearly 90% of Outstanding Mortgages Priced Based on Hibor He continued to point out that nearly 90% of outstanding bank mortgage loan rates are priced based on Hibor. Of course, the H mortgage interest rate has reached the capped rate and has become based on the prime rate, but "the capped rate is a sweet deal offered by banks to customers, helping customers bear the interest rate risk." In addition, most corporate loans are also priced based on Hibor, while loans based on the prime rate are mainly for small and medium-sized enterprises and personal loans. Currently, the H mortgage interest rate is generally Hibor + 1.3 basis points, with a capped rate of 3.25 basis points. In other words, when the 1-month Hibor falls below 1.95 basis points, the mortgage interest rate is expected to be lower than the capped rate. The Federal Reserve is Expected to Cut Rates Only After the Chairman Change in May Yesterday, the Chicago Mercantile Exchange FedWatch tool indicated that the probability of the Federal Reserve maintaining interest rates this week is as high as 95.6%. Wang Liangxiang, Managing Director of Zhenxiang Consulting, expects that after the Federal Reserve changes its chair in May, there will be an opportunity to cut interest rates in June, followed by another cut in September as inflation recedes, totaling two cuts of 0.5%. Previously, Shangshang expected the U.S. to cut rates three times this year for a total of 0.75%, with the earliest cut also in June. Difficult to Say if Commercial Real Estate Credit Quality Has Bottomed Regarding the quality of loans in Hong Kong, the specific non-performing loan (NPL) ratio of the banking sector slightly rose to 1.98% in the third quarter of last year. Yuen Kwok-hang stated that this is mainly related to commercial real estate loans in Hong Kong. It is currently difficult to say whether the credit quality of commercial real estate has bottomed out; it can only be said to remain challenging. However, "please do not predict the overall trend of NPLs, as there is a lot of uncertainty... As for whether it will rise, there is certainly a chance it will rise," so do not be overly optimistic too early. The uncertainty comes from the trend of U.S. interest rates, geopolitical situations, and so on. Related articles: Time Deposit Strategy | The Federal Reserve is expected to remain unchanged this week, and Hong Kong banks continue to offer preferential time deposits, with one offering up to 3.18%