Hong Kong mortgage war 'killing' banks

The decline in mortgage rates has spurred a recovery in the housing market, with home sales rising 42 per cent last month. Photo / Northern Advocate

Hong Kong high school teacher Chris Poon's dream of buying his first apartment was dashed in December when banks refused to fund more than 50 per cent of the HK$3.5 million ($702,633) purchase.

Poon, 33, tried again in May and got a loan covering 70 per cent of the price for the 65sq m apartment in Hong Kong's Sai Wan Ho district from BOC Hong Kong (Holdings).

The mortgage rate was 2.25 per cent, down from the 3.5 per cent that Poon was discussing with lenders last year.

Mortgage rates in the city are the lowest in at least 19 years, as far back as records are available, to offset slower demand for other types of credit during Hong Kong's worst recession in a decade. Among developed economies, only Japan offers similarly cheap loans, as its central bank has kept interest rates below 1 per cent for the past 14 years, said Leland Sun, founder of Pan Asian Mortgage.

"Hong Kong banks are killing themselves with the low rates," said Sun, whose Hong Kong-based firm advises homebuyers.

Average net interest margins for the city's banks - the difference between what they charge for loans and the cost to fund them - will narrow by as much as half a percentage point this year from 2008, said analyst Lee Yuk-kei at Core-Pacific Yamaichi International.

The aggregate margin declined to 1.62 per cent in the first quarter from 1.78 per cent in the previous three months, the Hong Kong Monetary Authority reported. At New York-based JPMorgan Chase the net interest margin climbed 37 basis points to 2.76 per cent in the first quarter. A basis point is 0.01 percentage point.

Banco Santander, Spain's largest bank, said its net interest margin rose to 3.34 per cent in the first quarter from 3.05 per cent three months earlier.

Thinner margins will slow any recovery in Hong Kong bank profits this year, Lee said. First-half results "are likely to be weak" because of pressure on loan profitability and weakening demand for credit, Citigroup analysts Simon Ho and Franco Lam wrote in a June 16 report.

The combined pretax profits of Hong Kong banks declined 28 per cent in the first quarter from a year earlier, according to figures submitted last month by the central bank to lawmakers. By contrast, first-quarter earnings at JPMorgan and Citigroup in the US and Deutsche Bank in Germany increased amid lower credit-market writedowns and higher trading profits.

Total loans in Hong Kong fell 0.5 per cent in April from March, sliding for a seventh straight month as an increase in mortgage lending failed to compensate for a drop in demand for credit among individuals and small- and medium-size companies.

The value of mortgage loans approved by Hong Kong banks rose for a sixth consecutive month in May to HK$28.1 billion, the highest since January 2008.

Banks cut home-loan rates in the city by 15 to 40 basis points in May to an average 2.08 per cent.

That's the lowest level since records began in 1990.

"With these kinds of mortgage rates, banks aren't really making much money," said Dominic Chan, a Hong Kong-based analyst at BNP Paribas Securities Asia.

"But for them it's probably still better than putting money in, say, US Treasury notes."

The yield on 10-year Treasuries fell to 3.54 per cent on June 26 in New York.

Chan has a "buy" rating on BOC Hong Kong Holdings, Bank of East Asia and HSBC Holdings, and a "hold" on Hang Seng Bank.

The Hang Seng Finance Index, which tracks shares of the city's biggest lenders, fell 17 per cent during the past 12 months, matching the benchmark Hang Seng Index's performance.

Bank of Communications, the Chinese bank 19 per cent owned by London-based HSBC, started offering mortgage rates on June 10 priced at as much as 3.25 percentage points below its prime rate, which stands at 5.25 per cent.

The prime rate is the benchmark banks use to calculate what to charge for mortgages.

"This is probably one of the lowest mortgage offers in history," said Patrick Chow, head of research at property agency Ricacorp in Hong Kong, referring to the Bank of Communications rate.

"We've seen lower offers in the past, but they only applied to specific new projects or were given only to select clients."

HSBC, Hong Kong's biggest bank by branches, began a new mortgage plan in March offering a fixed 2.18 per cent interest rate in the first year and a floating rate of 1.75 per cent below the prime rate thereafter.

BOC Hong Kong, which has the largest share of the mortgage market, announced a similar plan later that month, with rates as low as 2.16 per cent the first year.

"This mortgage price war will go on," Peter Wong, head of the Hong Kong unit of HSBC, said at a June 11 briefing. "Both corporate and personal lending has slowed down lately, and a lot of banks have switched their focus to the mortgage market."

Mitsubishi UFJ Financial Group, Japan's largest bank, charges about 2.48 per cent for a variable mortgage in its home market. The average 30-year fixed mortgage rate in the US was 5.42 per cent on June 25, up from 5.38 per cent a week earlier, according to Freddie Mac, the McLean, Virginia-based mortgage buyer.

The decline in Hong Kong mortgage rates has spurred a recovery in the housing market, with home sales rising 42 per cent by volume in May, the biggest increase since February 2008, data compiled by the government's Land Registry show.

Prices for so-called mass-market homes, or those smaller than 1000 square feet (93sq m), increased about 10.5 per cent in the two months through May 31, after falling almost 25 per cent during the second half of 2008, according to Hong Kong-based Centaline Property Agency.

Falling money market rates have underpinned the mortgage price battle. The three-month Hong Kong Interbank Offered Rate fell as low as 0.33 per cent on May 21, the lowest since January 2005, as the city's central bank cut borrowing costs and spent US$23 billion defending the currency's peg to the US dollar.

At 0.36 per cent, the Hibor is 84 basis points lower than the equivalent London Interbank Offered Rate. The spread was 60 points on April 22, just before the Hibor began to plunge.

"Last year the banks sounded like they didn't really want to lend me any money," said Poon, whose mortgage plan from BOC Hong Kong was 2.75 per cent below the bank's prime rate.

"This time it felt like they've got a price war going. Every bank I went to tried to tell me they could offer better deals than the others."

CHEAP LOANS

* Mortgage rates in Hong Kong are the lowest on record.
* Banks home-loan rates in May were an average 2.08 per cent.
* The combined pretax profits of Hong Kong banks declined 28 per cent in the first quarter from a year earlier.

- BLOOMBERG