HSBC and StanChart slash key benchmark rates in Hong Kong

Standard Chartered and HSBC, two of Hong Kong’s biggest banks, on Thursday have slashed their key benchmark rates in the city, their largest market. The move is bracing for its first recession since the global financial crisis following months of protests that is still continuing.

HSBC trimmed its best lending rate, also known as the ‘prime’ rate, by 12.5 basis points to 5.125%. It was the first cut since 2008.

Standard Chartered (StanChart) reduced its best rate to 5.25% from 5.375%.

Earlier on Thursday, the Hong Kong Monetary Authority (HKMA) chopped its policy rate by 25 basis points, tracking the Federal Reserve as obligated to by Hong Kong’s currency peg with the greenback.

Falling benchmark rates in Hong Kong and the United States will “make the operating environment for banks like HSBC more challenging in the future,” George Leung, an advisor at the lender, told reporters on Thursday.

On Monday, HSBC dropped its 2020 profit target, reported an 18% fall in pretax profits for July-September, and warned of a costly restructuring ahead.

Leung said that he hoped that HSBC’s lending rate cut would bring some “relief to customers, and maybe a little bit of sunshine to the gloomy economic outlook”. In Hong Kong, commercial banks do not always follow the central bank, and adjusting the prime lending rate will affect mortgages in the city, one of the least affordable housing markets globally.

StanChart on Wednesday warned of a darker economic outlook even as it posted a 16% growth in quarterly profit.

Announcing the policy rate cut, the head of the HKMA called on individuals to manage financial risks amid recession fears.

Eddie Yue, HKMA chief executive, told reporters that Hong Kong’s economy was facing “very large” downward pressure, partly because of “some local factors”.

The city’s embattled leader, Carrie Lam, said on Tuesday she expects the economy to contract for the full 2019 year, with the protests hampering business and a Sino-US trade war taking a toll on factory activity.

Official estimates of third-quarter growth for Hong Kong will be announced later on Thursday.

Despite the social unrest, Yue said there had been “no obvious outflows” from the Hong Kong banking system, adding that Hong Kong Dollar deposits rose 0.6% in September.

HKMA earlier this month cut the amount of cash that banks must keep as reserves, releasing an extra HK$200-300 billion ($25.50-38.24 billion) into the broader economy.

It also called nine major Hong Kong banks together to agree on measures to support small and medium enterprises in the city.

Meanwhile, Standard Chartered has registered a forecast-beating 16 per cent increase in quarterly profit. The bank is helped by rising income from corporate and private banking clients, but the bank flagged headwinds from a likely drop in global growth and lower interest rates.

The London-headquartered bank had set a goal to double its returns and dividends in three years by cutting $700 million in costs and boosting income, as part of a broader, second three-year turnaround plan.

StanChart flagged risks on Wednesday to its key returns target citing slowing global economic growth, trade tensions and protests in its biggest market of Hong Kong, after posting a forecast-beating 16% growth in quarterly profit.

The first of those in 2015-18 under Chief Executive Bill Winters focused on repairing a balance sheet ravaged by ill-advised lending in Asia, improving the bank’s internal controls, reducing costs, and shedding unwanted businesses.

StanChart’s pretax profit for the three months ended Sept.30 rose to $1.24 billion from $1.07 billion in the same period a year ago, above the $1 billion average of analysts’ forecasts compiled by the bank.

By flagging “growing headwinds” to earnings on Wednesday, StanChart joined its bigger rival HSBC in painting a darker outlook due to the Sino-US trade war, an easing monetary policy cycle and unrest in Hong Kong.

StanChart reported a jump of 1.6 percentage points in return on tangible equity to 8.9% in the third quarter, but for the nine-month period the key profit metric was at 8.6% compared to the more than 10% goal it has set itself by 2021.

“We are saying 10% still remains the target, however, being realistic since we put that target out there in February the rate outlook is towards the negative, and geopolitical events are still circling around,” StanChart Chief Financial Officer Andy Halford told reporters.

“We are saying ‘this will be a bit more difficult’, but it doesn’t stop us trying to get to that 10%,” he said. “We are very focused on getting to that number as we see it as an important one psychologically.”

Reuters