Hong Kong's banks should look beyond China

Hong Kong’s tepid growth is forcing its banks to rely ever more on China for profits. That may be the easy option — but they should look further afield.

Hong Kong’s economy is in trouble. House prices are falling. Economic growth is slowing so much Nomura analysts now predict a recession. The increasing — albeit slow — opening of China’s economy is challenging Hong Kong’s status as a crucial hub for foreign companies hoping to enter the mainland.

In this environment, it is unsurprising Hong Kong’s banks are looking outside the special administrative region for growth opportunities. It is perhaps even less surprising they are looking to China to ensure those returns, growing their loan books across the border and benefiting from their stakes in mainland lenders.

But although the move towards China has offered real benefits to these banks in the past, it is time they considered the benefits of diversification. The Philippines is an obvious bet.

China’s economy is on shaky ground. Officially, the country grew an eye-popping 6.7% in the second quarter. But economists think that growth relied too much on policy stimulus, and suspect even more will be needed in the future.

As always, some still question the statistics. One China-focused banker told FinanceAsia he wouldn’t be surprised if real economic growth was closer to 3%.

That may be unduly bearish. But there is little doubt the days of unfettered Chinese growth are coming to an end. The economy is slowing. Policy responses are becoming increasingly important — and increasingly desperate.

The Philippines, which grew at 6.9% in the first quarter, looks more resilient. The ratio of non-performing loans in the country is falling. The new government is striking a tone of continuity. Unlike many other Southeast Asian countries, the Philippines is not overly dependent on China for growth. The United States and Japan are far bigger export markets for the country.

The Philippines does present a quandary for Asia’s biggest banks. The market is too small. The entire Philippine banking system is worth only around 80% of the balance sheet of Singapore’s DBS Group.

But Hong Kong’s smaller banks will not have that problem. Chong Hing Bank’s entire balance sheet is worth around 5% of the banking assets in the Philippines. Dah Sing Bank’s is worth around 8.5%.

The obvious problem is one of access. Their small size may be a benefit in some ways, but it also means they will struggle to break into the Philippines. Despite a push by former president Benigno Aquino to bring more foreign banks into the market, getting licenses can still take time— and may not seem worth the effort.

But well-targeted joint ventures could do the trick, as could the acquisition of stakes in Philippine lenders. This would offer diversification from Chinese uncertainty. It would also offer Hong Kong banks access to a country that has a sizeable — and rich — Chinese population.

This might not seem the obvious move to bank executives who have an $11 trillion goliath on their doorstep. China has served them well so far. But it is time for them to look elsewhere for growth and safety. The Philippines would be a good start.

¬ Haymarket Media Limited. All rights reserved.
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