Hong Kong Mortgage War Poised to Heat Up, Biggest Lender Says

(Bloomberg) -- The price war in Hong Kong’s home-loan market is poised to heat up, according to the city’s top mortgage lender.

Even if the U.S. Federal Reserve raises borrowing costs in December, the excess funds in Hong Kong’s financial system will allow banks trying to stem slowing loan growth to keep undercutting each other on mortgages to attract borrowers, said Yip Wai-man, BOC Hong Kong (Holdings) Ltd.’s deputy general manager of personal banking and wealth management.

Local banks are seeking to boost mortgages -- which have delinquency rates near zero -- to help offset weakening demand for overall lending amid China’s economic slowdown. Lenders have cut mortgage rates by about 30 basis points to 1.4 percentage points above the Hong Kong Interbank Offered Rate since the beginning of the year, Yip said, adding that the gap may narrow to 1.3 to 1.35 percentage points in the next 12 months.

“Banks are competing against each other to get mortgage customers on board,” Yip said in an interview on Tuesday in Hong Kong. “One little move by a bank will lead the whole market to follow.”

The tussle over mortgages risks reigniting fears of a property bubble in Hong Kong, which the city’s government has been trying to quell with various cooling measures introduced over the past two years. Housing sales have rebounded from a 25-year low in February as bargain prices and lower borrowing costs lured buyers.

Yip’s firm, the Hong Kong arm of Bank of China Ltd., is the city’s largest mortgage lender in terms of the number of loans extended for finished apartments this year, according to Centaline Mortgage Broker Ltd. Its market share of 19.9 percent is followed closely by HSBC Holdings Plc’s 19.7 percent, illustrating the tight competition in the market.

Funding Costs

Lower mortgage rates have put pressure on banks’ profitability, dragging down the average net interest margin at the city’s retail lenders to about 1.3 percent in the second quarter from 2 percent in 2008, according to Hong Kong Monetary Authority data.

BOC Hong Kong’s funding costs “are relatively low” because it has a large pool of deposits in its current and savings accounts, Yip said. “Our margins aren’t bad compared to” segments like syndicated loans and large corporate lending, she said.

The bank’s customer deposits amounted to HK$1.47 trillion ($190 billion) as of June, up 4.7 percent from December, according to its interim report. The balance of funds in Hong Kong’s banking system stands at about HK$260 billion, compared with about HK$5 billion before the collapse of Lehman Brothers Holdings Inc. in September 2008.

That balance, which represents the funding available in the interbank system for settling transactions among the banks themselves or with the HKMA, had risen to a record HK$426 billion in November after China’s currency devaluation last August sparked conversions of yuan into Hong Kong dollars.

Higher loan volumes may offset any margin compression. The number of homes sold reached 7,826 with a value of HK$56 billion in September, according to government figures released earlier this month. That’s more than four times February’s 1,807.

“We can get more quality customers by expanding the mortgage business, which remains profitable after cuts,” Yip said. “The price war won’t go away anytime soon.”

To contact the reporter on this story: Alfred Liu in Hong Kong at aliu226@bloomberg.net.

To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Darren Boey

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