Global bank considering a restructure even as news of international risk exposure breaks
Australia’s tenth largest home lender is looking nervously north to what was once it’s home.
According to a report in the Financial Times, HSBC’s exposure to defaulted commercial property loans in Hong Kong have jumped almost six times in the first half of 2024, reaching over $3 billion, highlighting the significant risks the UK listed bank faces amid the sharp downturn in Hong Kong’s real estate market.
The news comes at an awkward time – pressured by major shareholders like Ping An insurance, the bank has said it wants to focus on Asian expansion at the cost of an exit from up to 12 countries.
Millions of the territory’s residents have seen real estate as a sure thing, and for many years it has been. Now however, a Covid fuelled retreat from the office and political upheaval have shaken the ex-British colony.
By June 30, HSBC reported $3.2 billion in “credit impaired” commercial real estate loans to Hong Kong-based clients, a significant rise from $576 million just six months earlier, according to the bank’s financial statements for the first half of the year.
Hong Kong is HSBC’s largest market for commercial property lending, comprising 45% of its overall exposure, compared to 18% for the UK.
Globally, HSBC’s total commercial real estate lending amounted to $79 billion as of June. The $3.2 billion in impaired loans represent 9% of the bank’s entire Hong Kong commercial real estate portfolio.
The rapid increase in loan defaults indicates how deeply the downturn in Hong Kong’s commercial property sector—a market that has long been one of the world’s most expensive—is affecting banks. Cushman & Wakefield, a commercial property adviser, reported that prime office rents in the region have plummeted by more than 35% since 2020. The company predicts a further slip of -7 to -9% this year as 700,000s of newly completed office space is expected to become available before the year end.
While banks have been concerned for years about their exposure to China's property market, attention is now turning toward Hong Kong, according to David Wong, head of North Asia bank ratings at Fitch.
“We’re a lot more comfortable saying a line has been drawn under [banks’ exposure to] China commercial real estate, versus Hong Kong,” Wong told the FT. “I don’t think we’ve seen the bottom yet.”
Under HSBC’s criteria, these loans are considered impaired when borrowers fail to meet loan terms. This could include missed payments or non-financial breaches like failing to meet a loan-to-value ratio target.
Georges Elhedery, HSBC’s CEO since September, mentioned during a call with analysts in August that despite being classified as credit impaired, the loans were “all performing.” He also noted that “a large number” of these loans had been marked as impaired.
However, in the financial report released on July 31, the bank acknowledged that “certain borrowers have sought payment deferrals to accommodate debt serviceability challenges.”
Higher interest rates have put additional strain on Hong Kong borrowers, particularly as demand for office and retail spaces has decreased. Contributing factors include China’s slowing economy and Beijing’s national security law, which has deterred international investors. Furthermore, strict zero-Covid policies led to a significant departure of foreign workers during the pandemic.
HSBC's data shows that as of June, Hong Kong borrowers accounted for 45% of the bank’s total credit-impaired commercial property loans, a sharp rise from 13% six months earlier.
Elhedery, who has only just replaced Noel Quinn as the bank’s head, explained during the earnings call that the bank had adopted a “probably prudent approach” in reclassifying the loans and expressed confidence in the medium- to long-term outlook for Hong Kong’s commercial property market, especially if interest rates decline.
The bank added that its collateral coverage remained strong and “broadly stable,” despite falling property values, and that provisions for credit losses were “relatively low” due to high levels of collateralisation.
Ming Lau, HSBC’s Asia CFO, noted during the call, “I think for those of us living in Hong Kong, you can see vacancy rates are higher at this point.” However, he also pointed out that the loans are structured so that the bank can access borrowers’ “other assets and cash.”
The news comes as Elhedery tries to grapple with costs at the giant lender, and tries to cut the behemoth’s headcount to 200,000 – a number that Quinn had said he would reach by the end of last year. Senior staff are currently discussing the possibility of merging the bank’s commercial and investment banking units – cumulatively responsible for 59% of HSBC’s revenue.
HSBC Holdings plc is headquartered in London, with deep historical roots in Asia. Originally founded as The Hongkong and Shanghai Bank on March 3, 1865, in British Hong Kong, it expanded quickly, opening a branch in Shanghai that same year.
Incorporated in 1866, the bank was established to support growing trade between China, India, and Europe. Sir Thomas Sutherland, the bank’s founder, aimed to create a bank based on Scottish banking principles, and HSBC's first office was strategically located in Hong Kong, chosen for its favourable feng shui.
Over the years, HSBC grew to become one of the world’s largest banks, acquiring Midland Bank in 1992 and establishing HSBC Holdings plc as its London-based parent company in 1991. This move solidified its presence in Europe and made it one of the UK's largest banks. HSBC operates in 62 countries and territories, serving about 39 million customers globally.
Its Australian arm, headquartered in Bangaroo, Sydney employs over 2000 people.
Throughout its history, HSBC has been involved in major acquisitions, expanding its influence across Asia, Europe, and the Americas. Notable purchases include the Brazilian bank Banco Bamerindus and the U.S. Republic National Bank of New York. It has also expanded in France and Mexico, further strengthening its global reach.
Today, HSBC is Europe’s largest bank by assets, with $3.038 trillion in 2023, and holds significant influence in both Western and Eastern markets, with dual listings on the London and Hong Kong stock exchanges.
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