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Hang Seng Bank sees net interest margin to fall further as local rates squeeze

Hang Seng Bank Ltd., 62.14%-owned by HSBC Holdings PLC, said its net interest margin may shrink further in the second half of 2020, as local interest rates continue to fall and loan repricing opportunities are limited.

In the second quarter ended June 30, the Hong Kong lender's net interest margin stood at 1.80%, down from 2.13% in the first quarter, CFO Andrew Leung said in an Aug. 3 earnings teleconference after reporting a 33% year-over-year drop in first-half net profit.

"The decline of net interest margin [in the second quarter] might not have fully reflected the continued drop of the interbank lending rate," Leung said, without giving a more specific projection of the margin.

The one-month Hong Kong Interbank Offered Rate, or Hibor, stood at 0.28% as of Aug. 3, according to Hang Seng Bank's website. It was down from 1.00% on June 1 and 2.05% on March 31.

Leung added that the bank sees limited opportunities to reprice loans at higher interest rates. "There is in general more pressure on overall loan repricing, as banks are very competitive in taking up quality loans and, therefore, credit pricing will still be tight," he said.

During the first half of 2020, Hang Seng Bank's expected credit losses and other credit impairment charges rose to HK$1.76 billion from HK$510 million a year ago, amid lingering uncertainties over COVID-19 and global trade tensions, according to the company's earnings statement.

Nonperforming loan ratio rose to 0.32% as of end-June, from 0.22% as of end-2019. Gross impaired loans and advances increased 46% to HK$3.03 billion from the end of 2019, the statement said.

Chief Risk Officer Yeo Chee Leong told the same conference that less than 10% of the bank's total outstanding loans were under moratorium as of end-June, most of which were wholesale loans to corporate borrowers. The bank is discussing with the Hong Kong Monetary Authority about the possibility of extending moratorium for its borrowers.

CEO Louisa Cheang added: "The group remains vigilant in light of the unprecedented COVID-19 pandemic and will continue to closely monitor the market situation. Reviews on credit portfolios are carried out regularly to help identify and mitigate any potential risks."

The bank announced a dividend of HK$1.90 per share for the first half of 2020, down 32% from HK$2.90 per share a year earlier, partly to conserve capital. Cheang declined to say whether the dividend cut will continue into the second half of 2020.

Key capital and liquidity ratios were largely steady. As of end-June, common equity Tier 1 capital ratio stood at 16.3%, compared with 16.9% six month ago; liquidity coverage ratio, which indicates the bank's ability to meet short-term obligations, stood at 198.0%, compared with 198.5% a year ago.

During the first half ended June 30, earnings at Hang Seng's retail banking and wealth management segment, which contributed to half of the lender's pretax profit, fell 35% to HK$5.47 billion from HK$8.40 billion a year earlier. Pretax profit of its commercial banking operation also fell 35% to HK$3.23 billion from HK$4.97 billion.

Meanwhile, thanks to buoyant trading conditions, pretax profit of its global banking and markets segment rose about 9% to HK$2.65 billion from HK$2.43 billion.