From 5855a5a1a5b95fd6ebd2169e2a131deba30d5d8d Mon Sep 17 00:00:00 2001 From: krystaljephcot Date: Tue, 4 Nov 2025 12:21:59 +0300 Subject: [PATCH] Update 'Credit Risk Management Of Commercial Real Estate Exposures' --- ...Risk-Management-Of-Commercial-Real-Estate-Exposures.md | 15 +++++++++++++++ 1 file changed, 15 insertions(+) create mode 100644 Credit-Risk-Management-Of-Commercial-Real-Estate-Exposures.md diff --git a/Credit-Risk-Management-Of-Commercial-Real-Estate-Exposures.md b/Credit-Risk-Management-Of-Commercial-Real-Estate-Exposures.md new file mode 100644 index 0000000..9ad2394 --- /dev/null +++ b/Credit-Risk-Management-Of-Commercial-Real-Estate-Exposures.md @@ -0,0 +1,15 @@ +
The Hong Kong Monetary Authority (HKMA) published today the ratio of the banking sector at the end of the 2nd quarter. The ratio was 1.97%, broadly similar to 1.98% at the end of March. As I have discussed on different occasions, the classified loan ratio continues to deal with upward pressure, mostly driven by business property (CRE) loans. Pressures in global CRE (consisting of retail residential or commercial properties and offices) coming from the rise of [e-commerce](https://www.propertynetlk.com) and remote work in current years are also evident in Hong Kong. An increase in workplace completions has actually likewise led to continuing adjustments in the rates and rents of CRE in Hong Kong throughout the first half of 2025. Moreover, the high rate of interest environment over the previous couple of years has intensified the debt-servicing burden of commercial residential or commercial property designers and investors, drawing market attention and raising concerns on the capability of banks to effectively handle the pertinent risk direct exposures and monetary stability danger. I intend to clarify these inquiries here.
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Standing together with enterprises
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CRE prices and rents are presently under pressure from various elements, consisting of rates of interest and market supply and demand characteristics, which have resulted in a decrease in the worth of loan collateral. Borrowers are not surprisingly fretted as to whether banks will require instant repayment. To address this, the HKMA and the banking sector have actually repeatedly emphasised that while the fall in local residential or commercial property costs and rents over the last few years have led to a downward change to the independent residential or commercial property evaluations, banks think about a host of aspects when evaluating credit line, including the customer's credit need, overall financial position and payment ability. Banks will not adjust a credit line simply due to a change in the value of the residential or commercial property security.
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There have actually likewise been misunderstandings that property owners might refuse to [adjust rents](https://investir-en-grece.fr) in [reaction](https://www.carib-homes.com) to market conditions or perhaps leave residential or commercial properties uninhabited out of concern over banks demanding loan payments. However, this does not align with banks' real practices, and is likewise not rational from a danger management angle. In fact, banks have actually earlier made it clear that they would not require immediate repayment solely due to a decline in rental earnings. This [practical](https://apartmentforrentals.com) and flexible technique shows banks' determination to stand together with business, as well as their position and commitment to ride out tough times with the neighborhood.
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If a debtor in short-term monetary trouble breaches the regards to the loan covenant, will it lead to the bank requiring instant payment? The response is not always so. In practice, banks will first negotiate with the borrower, for instance, by adjusting the repayment plan such as the loan tenor. Banks will take proper credit actions only as a last hope to safeguard the soundness of their operations and the interest of depositors.
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Protecting banking stability and [depositor](https://multiplanet.ae) interests
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The general public may therefore question if banks' assistance for enterprises will come at the expense of banking stability and depositor interests. There is no need to worry as the HKMA has been closely keeping an eye on the overall healthy advancement of Hong Kong's banking sector. We believe that the credit threat related to CRE loans is workable. A significant part of Hong Kong banks' exposures associating with regional residential or commercial property advancement and investment loans are to the big players with relatively great monetary health. For exposures to small and medium-sized local residential or commercial property designers and financiers, consisting of some with weaker financials or higher gearing, banks have actually currently taken credit risk mitigating procedures early on, and many of these loans are secured. Besides, there is no concentration risk at individual debtor level.
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A [current media](https://freebroker.co) report highlighted the dangers connected with CRE loans, with a specific focus on the accounting of banks' "expected credit losses". In fact, this is merely an estimation based upon [modelling](https://meza-realestate.com) for accounting purposes. Loans categorized as "anticipated credit losses" do not necessarily represent uncollectable bills, and therefore can not be utilized as a basis for a thorough assessment of banks' property quality.
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Similarly, some other commentaries have focused entirely on banks' classified loan ratios, which provides a somewhat limited viewpoint. Hong Kong has gotten in a credit downcycle in the last few years, having actually been impacted by elements like macroeconomic modification and rate of interest level. This has naturally caused a boost in the classified loan ratio of the banking sector. While the classified [loan ratio](https://overseas-realestate.com) has actually gradually gone back to the long-lasting average of around 2%, from 0.89% at the end of 2021, the ratio stays far below the 7.43% seen in 1999 after the Asian Financial Crisis.
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To gain a detailed understanding of credit quality, one can consider the following widely and long-used indications:
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- The very first fundamental indication is the capital adequacy ratio: The healthy development of the banking sector includes building up capital throughout the expansion stage of the credit cycle, such that when the credit cycle changes and we see credit expenses go up and a degeneration in asset quality, banks would have sufficient capital to soak up the credit expenses. Banks in Hong Kong have ample capital - the Total Capital Ratio for the banking sector stood at 24.2% at the end of March 2025, well above the international minimum requirement of 8%. +- The second crucial indication is the provision protection ratio: When evaluating non-performing loans, the [vital question](https://www.fiorinirooms.com) is whether the appropriate losses will impact a bank's core foundation. The arrangement coverage ratio is used to gauge if the provisions for non-performing loans suffice. If a bank adopts sensible threat management and its [provision coverage](https://drhomeshow.com) ratio stays above 100% after subtracting the worth of security from the non-performing loans, it indicates that the prospective losses from non-performing loans have actually been properly reflected in the bank's provisions. For the Hong Kong banking sector, arrangements are enough, with the arrangement coverage ratio (after subtracting the value of security) standing at about 145% at the end of March 2025. +- The third indicator is clearly financial strength: Despite the higher public attention on non-performing loans, one essential criterion when evaluating a bank's soundness is whether the bank can maintain excellent [monetary](https://leonisinmobiliaria.com) strength and its earnings design can be sustained after subtracting credit costs. In this regard, Hong Kong's banking system taped revenue growth in the last three successive years even after taking into consideration the costs for anticipated credit losses. The total pre-tax operating revenue of retail banks increased by 8.4% year-on-year in 2024, and by 15.8% year-on-year in the first quarter of 2025, demonstrating sound financial strength.
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These three essential indicators show that Hong Kong's banking system is well-capitalised and has enough arrangements and excellent financial strength to withstand market volatilities. In the face of a still-challenging macroeconomic environment, the credit threats faced by the banking sector have increased recently, yet the earnings designs of banks have not been impacted. I would likewise like to take this opportunity to clarify the earlier "bad bank" rumour. The facility of a "bad bank" is an amazing procedure which would only be considered when banks have very severe balance sheet issues. This is completely irregular with the present situation of banks in Hong Kong, which are operating in a sound manner with strong financial strength.
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Hong Kong's banking sector has actually securely cruised through the 1998 Asian Financial Crisis, the 2008 Great Financial Crisis, the couple of years following the Covid-19 pandemic in addition to the 2023 banking chaos in the US and Europe, showing its strength and resilience. Although the worldwide financial outlook goes through different uncertainties and numerous industries have been badly impacted, the banking sector has stayed sympathetic to consumers in difficulties and has been riding out challenges with them, one crisis after another. This is a testament to both the capability and dedication of the banks to weather hard times with the community. The HKMA, together with the banking sector, will continue to do their utmost to support the advancement, upgrade and transformation of the real economy.
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