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Hang Seng Bank's mainland China unit weighed down by higher funding costs

Pretax profit from the mainland China operations of Hong Kong-based Hang Seng Bank Ltd. dropped in 2017 on the back of a tightening funding environment that is making life difficult for smaller lenders in the country.

Elevated funding costs have been crimping the profitability of banks such as Hang Seng that lack a sizable local depositor base. Tighter interbank liquidity and the Chinese government's develeraging drive have boosted the cost of funds for smaller banks in particular, in turn pushing down net interest margins.

Bigger banks in China, by contrast, have seen their net interest margins improve as smaller lenders turn to them for additional funds to make more loans or to meet reserve requirements.

At Hang Seng, that trend translated into a 13% year-over-year drop in mainland China pretax profit, to HK$241 million, although the division accounted for just 1% of the bank's HK$23.67 billion in overall pretax earnings.

"Last year, funding costs went up and our margin narrowed," said Gordon Lam, CEO of Hang Seng China. "Having said that, noninterest income wasn’t bad in 2017, thanks to the pick-up of cross-border transactions and increased sales of funds and insurance products."

Louisa Cheang, who became CEO of Hang Seng Bank on July 1, added: "China is a long-term investment. The drop last year does not have a big impact on our strategy."

Lam did not disclose the net interest margin for Hang Seng's mainland China operation. The lender's overall net interest margin, including its much larger Hong Kong operation, improved to 1.94% from 1.85% in 2016.

Full-year net profit, meanwhile, rose a forecast-beating 23% year over year, on the back of continued growth in lending as well as higher income from foreign-exchange and derivatives trading. Pretax profit from the Hong Kong business was up 25% to HK$23.24 billion, with total pretax profit rising 24%.

The bank, which is 62.14%-owned by HSBC Holdings Plc, did not provide net profit figures by geography.