HSBC's Lin Huihong: Loan demand will not rebound immediately, leading the way to reduce P unexpectedly, preparing for next month's interest rate hike

The Federal Reserve in the United States cut interest rates by 0.5 basis points last month, and Hong Kong banks subsequently lowered the prime rate by 0.25 basis points, marking the beginning of an interest rate cut cycle. Diana Cesar, CEO of HSBC Hong Kong, expects that the demand for credit in Hong Kong will not rebound immediately; currently, the vacancy rate for Grade A office buildings is at a historical high, indicating that the overall commercial real estate market will remain weak for a period of time. Despite the rate cut being helpful, the market is oversupplied and an immediate rebound is unlikely, requiring more time to recover.

High Vacancy Rates in Grade A Buildings, Continued Weakness in Commercial Real Estate

HSBC's unexpected move to cut the prime rate last month following the U.S. prompted surprise in the market. Diana Cesar explained that the current interest rate environment and macroeconomic factors are different, and the previous approach "is not a correlation." HSBC expects the Federal Reserve to cut rates by 0.25 basis points at each of the next 6 meetings, bringing the federal funds target rate range down to 3.25 to 3.5 basis points by June next year.

Recently, risks in the Hong Kong commercial real estate market have been a cause for concern. Diana Cesar anticipates that due to oversupply in the market, the overall commercial real estate sector will remain weak for some time. She specifically mentioned the high vacancy rate in Grade A office buildings, currently around 14%, which will take time to absorb, especially with new properties coming onto the market. The market outlook not only depends on interest rates but also on the outlook of businesses and individuals towards future trends. With the start of the rate cut cycle, she believes that as economic activities truly recover, the commercial real estate market will improve over time, although not immediately.

Despite the challenging outlook, Diana Cesar emphasized that under the prudent supervision of the HKMA, Hong Kong banks are cautious in their approach to commercial real estate lending, expressing confidence in the overall management of banks in the Hong Kong property market.

Using HSBC as an example, in the first half of the year, provisions and loan classifications were very cautious, with many borrowers still paying current interest. The overall loan-to-value ratio reached 60%, and the loan-to-value ratio for impaired loans was 55%, demonstrating prudent management of the balance sheet.

Low Mortgage Default Rates, Insufficient Concerns about Negative Assets

Regarding mortgage loans, Diana Cesar stated that the overall default rate in the market is 0.1%, which is a very low level. She mentioned that despite reports of negative assets, it is not a real concern. HSBC recently launched a new fixed-rate mortgage plan with a fixed rate of 3.25% for the first 3 years and 3.15% for the first 5 years, providing certainty to customers. Within days of its launch, they received inquiries from over a hundred customers.

Currently, overall loan demand remains weak, with the overall market annualized loan volume dropping by 4% in the first 8 months. Diana Cesar admitted that she does not expect loan demand to rebound immediately, but with the adjustment in interest rates, she estimates that all customers will review different financing options, describing this as a good start. Improvement is also expected in wealth management business, with hopes that more customers will transfer their time deposits to stocks and more diversified wealth management products.

As a leading bank, HSBC's interest rate trends often lead the market. Reflecting on the last prime rate cut, Diana Cesar mentioned that some people may find it unexpected and different from previous practices, but setting interest rates involves considering many factors. She explained that before the Fed cut rates, the Hong Kong Interbank Offered Rate (HIBOR) had already fallen, and a comprehensive decision had to be made considering macroeconomic factors and funding costs The bank has prepared multiple scenarios, such as the Federal Reserve cutting rates by 0.5 basis points or 0.25 basis points, to respond promptly and agilely.

Looking ahead to future trends, Lin Huihong said that the next interest rate decision by the Federal Reserve will be on the day after the U.S. election. It is expected that market experts will have divergent views. HSBC will prepare several plans to respond to different scenarios. It is not ruled out that until the last few days, or even minutes, decisions may be "switched" due to data.

She jokingly mentioned that in her nearly 3 years as CEO, "no matter which country I am in the world, no matter what time zone, at 11:30 am (Hong Kong time), they (colleagues) will call me and urge me to 'press the button' (approve) quickly... If it's not approved by 11:30 am, they will 'call until the phone explodes'", so she will definitely inform the market promptly about the latest decisions on interest rates.

Interview and article by: Wang Shuting