Loan to deposit ratio among Hong Kong banks ballooned to 73.6%

Should we be worried?

The HKMA’s June monetary statistics showed loan growth of 1.6% m/m, which outpaced deposit growth of 0.9% m/m. The loan-to-deposit ratio increased further to 73.6% (May: 73.1%).

According to a research note from Barclays, system deposits in June rose by 0.9% m/m (May: +1.4% m/m), led by HKD and USD deposits, which were up 1.8% and 1.0% m/m respectively. RMB deposits dropped 3.1% m/m to RMB 925.9bn, accounting for 12.0% of system deposits.

Meanwhile, system loans grew 1.6% m/m in June (May: +1.6%), led by loans for use in Hong Kong (+1.9%). Loans for use outside Hong Kong continued to grow slowly at 0.6% m/m as banks increasingly focus on managing credit risk in an environment of slower economic growth in China.

Trade finance loans were up 2.5% m/m. As loan growth outpaced deposit growth, the system loan to deposit ratio increased to 73.6% (May: 73.1%).

Here's more from Barclays:

Loan growth in 1H driven by loans to financial companies, housing, personal and China: Based on the HKMA's quarterly loan disclosure by sector, loan growth of 3.6% q/q was driven mainly by loans to the non-bank financial sector (+10.5% q/q), and other commercial sectors (+14.2%).

Mortgage loans were up 2.1% q/q.

Funding costs likely to trend higher: Composite interest rate, which is a measure of the system funding costs, rose by another 2bps m/m to 47ps as banks run HKD and RMB promotional time deposit campaigns.

Funding costs is likely to trend higher as regulators put more emphasis on sufficient stable funding sources to support balance sheet growth and system liquidity remains tight persistently.

Mortgage market grows: The June mortgage survey showed new mortgage loans drawn down increased to HK$17.6bn, +7.7% m/m (May: +2.3%), the highest level since 1Q13.

Outstanding mortgages inched up by 0.7% m/m as new mortgage loans booked offset principal repayments.

Demand for mortgages has picked up slightly after the government fine tuned the Double Stamp Duty (DSD) rule in mid-May 2014.

There has been a continued shift from Prime to Hibor-based mortgages since 3Q13 with the proportion of Hibor based out of total new mortgages approved at 77% (vs. 26% in September 2013).

The average system mortgage rate was largely stable at 2.20% (May: 2.19%) on our calculations and will likely not decline further after the 15% mortgage risk weight floor limited imposed by the HKMA since February 2013.