Hong Kong Banks Warned About Mortgage-Rate Reductions

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Bloomberg Hong Kong’s central bank warned lenders in the city that their “intense price competition” on mortgages isn’t sustainable and may erode industry profit margins and increase risks. Banks have cut home loan rates “to such an extent that they might not have given due regard to the reputation risk, interest rate risk and liquidity risk potentially associated with their pricing,” Hong Kong Monetary Authority Deputy Chief Executive Y.K. Choi said in a letter to the Hong Kong Association of Banks, which was published on the HKMA Web site. Mortgage rates in the city are the lowest in at least 19 years, as far back as records are available, as banks seek to offset slower demand for other types of credit. Lenders including Bank of East Asia Ltd. and Standard Chartered Plc have been offering homebuyers costs as low as 3.25 percent below the benchmark rate they use for pricing mortgages. “I wouldn’t be too concerned about this,” said Dominic Chan, a Hong Kong-based analyst at BNP Paribas Securities Asia Ltd. “This sounds more like a gesture than any concrete action to make banks tighten lending. It’s the regulator’s job to raise the alarm when home prices have gone up so much lately.” Choi said that once the cost to fund loans begins rising, banks may have to raise interest rates even faster. Banks’ prime rates are currently 475 to 500 basis points above the Hong Kong Interbank Offered Rate, compared with the average spread of about 390 basis points over the past five years, he wrote. A basis point is 0.01 percentage point. The central bank will approach individual banks to “understand their pricing strategy,” Choi said. ‘Exceptionally Wide’ The current prime-Hibor spread is “exceptionally wide and can change rapidly,” Choi wrote in the letter. Banks should set mortgage rates with reference to the “long-term average spread” to avoid having to raise rates quickly, he said. The decline in Hong Kong mortgage rates has spurred a recovery in the housing market. Home prices in Hong Kong have climbed 26 percent this year, according to the Centa-City Leading Index, a weekly measure of residential values developed by Centaline Property Agency Ltd. and the City University of Hong Kong. Falling money-market rates have underpinned the mortgage price battle. The three-month Hong Kong Interbank Offered Rate fell to 0.19 percent on Sept. 7, the lowest since January 2005, after the city’s central bank cut borrowing costs and spent $23 billion defending the currency’s peg to the U.S. dollar. The Hang Seng Finance Index, which tracks the performance of Hong Kong-listed banks, fell 0.1 percent to 34,262.36 at the 12:30 p.m. break in Hong Kong. To contact the reporter on this story: Kelvin Wong in Hong Kong at kwong40@bloomberg.net This e-mail address is being protected from spambots. You need JavaScript enabled to view it