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Developments in the banking sector

HIGHLIGHTS OF KEY TRENDS

Banking sector performance

The aggregate pre-tax operating profit of retail banks’ Hong Kong offices recorded a modest growth of 4.5% in the first three quarters of 2016 compared with the same period last year. The growth was mainly attributed to increases in income from foreign exchange and derivatives operations (+35.7%) and in dividends received from subsidiaries (+117.4%), and a decline in operating expenses (-4.9%), though partly offset by a fall of 14% in fee and commission income (Table 1).

The year-to-date annualised net interest margin of retail banks improved to 1.32% in the first three quarters from 1.30% in the first half of 2016 (Chart 1). It stayed at broadly the same level as in the same period of 2015.

As retail banks’ total deposits increased at a faster pace than total loans, the loan-to-deposit ratio of retail banks declined to 55.2% at the end of the third quarter from 57.0% a quarter earlier (Chart 4). Retail banks’ total loans increased by 1.0% during the period, with loans for use in Hong Kong (including trade finance) rising by 1.2% and loans for use outside Hong Kong expanding by 0.2% (Chart 6). Retail banks’ classified loan ratio edged up to 0.81% at the end of the third quarter from 0.80% a quarter earlier, but remained at a low level by historical standards (Chart 8).

For the banking sector as a whole, total Mainlandrelated lending increased by 3.2% to HK$3,552 billion (15.9% of total assets) at the end of the third quarter from HK$3,443 billion (15.6% of total assets) a quarter earlier (Table 2). The classified loan ratio of Mainland-related lending dropped to 0.89% from 0.92% during the period (Table 3).

Results of surveys on debt securities and off-balance sheet exposures to derivatives and securitisations

The total market value of debt securities held by the surveyed authorized institutions (AIs) increased by 26.9% to HK$4,538 billion at the end of the third quarter of 2016 from HK$3,577 billion a year ago. The notable rise was largely driven by an increase in holdings of non-structured debt securities (Chart 13). Most of the non-structured debt securities were investment grade securities issued by sovereigns and banks (Table 4). As deposit growth continued to outpace loan growth during the last four quarters, surveyed AIs invested their excess funds into debt securities, resulting in a further expansion of their debt securities portfolios.

The total notional amount of outstanding derivatives contracts held by the surveyed AIs rose by 5.4% to HK$81 trillion at the end of June 2016 from a year earlier (Chart 15). Over-the-counter (OTC) swap and forward contracts accounted for about 90% of all derivatives contracts held (Table 5). Similar to previous periods, most derivatives contracts held were exchange rate contracts and interest rate contracts, which together accounted for 98.2% of the total notional amount of all outstanding derivatives contracts at the end of June 2016 (Table 6). Separately, the off-balance sheet securitisation exposures of the surveyed AIs remained insignificant, with aggregate amount of exposures totalling HK$7.6 billion at the end of June 2016.

Key performance indicators of the banking sector are provided in the Appendix.

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Content provided by Hong Kong Monetary Authority
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