Hong Kong banks' system loans dipped 1.2% in March

Here's the main culprit.

According to Barclays Research, the HKMA’s March monetary statistics showed declines in system loans (-1.2% m/m) and deposits (-1.5% m/m). System loan-to-deposit ratio rose to 74.3% (from 74% in February), another record high since 2000. Broad based loan contraction was mainly driven by loans used in Hong Kong (-1.7% m/m).

Here's more:

Deposit competition has intensified in recent months as banks use promotional time deposit campaigns to attract funding. We believe funding cost pressure will persist as system liquidity remains tight.

Among the local Hong Kong banks, we most prefer Hang Seng Bank (11 HK, OW), which is most leveraged to rising interest rates, more defensive to deposit competition with its strong deposit franchise and solid risk management record.

Broad based loan and deposit contraction: System loans reduced by 1.2% m/m in March (Feb: +3.2%), and decline was broad based. 

Loans for use in Hong Kong dropped 1.7% m/m (Feb: +4.1%), trade finance declined by 0.8% m/m (Feb: 2.6% m/m) and loans for use outside of Hong Kong was down by 0.3% m/m (Feb: 1.4% m/m). System deposits in March dropped by 1.5% m/m (vs +1.6% m/m in February), led by HK$ deposits (-2.2% m/m) and US$ (-2% m/m). Only RMB deposits reported growth of 2.7% m/m to RMB945bn, despite recent RMB volatility.

Funding cost rises, system loan-to-deposit ratio at another record high since 2000: System loan-to-deposit ratio further rose to 74.3% (vs. 74% in February), another record high since 2000, as decline in deposits (-1.5% m/m) outpaced decline in loans (-1.2% m/m). 

Deposit competition has already intensified in March, evidenced by the 4bp m/m rise in system funding cost to 41bps, the highest level in 2 years. Many banks are running HK$ and MB promotional time deposit campaigns to grow deposit base. We expect funding cost to continue to rise as system liquidity continues to tighten. The HKMA is watching credit growth very closely and is ensuring banks have adequate deposit funding.