The Hong Kong Monetary Authority (HKMA) has warned several banks against the risk of interest rates in their mortgage portfolios.
According to HKMA’s half-yearly report, net interest margins of local lenders narrowed to a record low 1.48 percent in December, laying pressures on their non-interest income.
On the positive side, profitability of local banks improved slightly in the second half despite a modest net write-back of provisions and higher non-interest income.
The de facto central bank attributed the increase in mortgage competitions, the redeployment of surplus funds to safer and more liquid assets with lower yields and the drop of net interest margins to a narrowing HIBOR-based lending margin.
It spurred concerns about the sufficiency of the interest rate risk buffer, when effective mortgage rates were prime minus 3.25 percent or about 2 percent.
"A sharp reversal of the spread between best lending rates and the Hong Kong interbank offered rates could lead to significant basis risks for banks and quickly erode their interest margins," said the HKMA.
The authority has urged HK banks depending on interbank markets to finance their mortgage portfolio to closely monitor such a risk in interest rates.
HKMA added that capitalization of the banking sector remained strong. But authorities have pointed out two adverse factors to those banks that wanted to increase their capital in the medium term: the maturing of major debt securities issued by European and American banks and the Basel Committee on Banking Supervision’s new capital rules.
The HKMA stressed that the primary financial risks locally are the build-up of excessive borrowing in the private sectors, the potential interest rate volatility and a further increase in asset prices.