Investment bank Goldman Sachs recently released a report pointing out that the downturn in the Hong Kong commercial real estate market has led to an increase in non-performing loans in the banking sector, which is expected to downgrade profit forecasts for Hong Kong banks. Goldman Sachs has recommended a “sell” rating for Hang Seng Bank.
The report reveals that the implicit non-performing loan ratio in the Hong Kong commercial real estate sector has risen to 14%, while the non-performing loan ratio for small and medium enterprises has reached as high as 55%. If the EBIT (earnings before interest and taxes) of commercial real estate continues to decline, the implicit non-performing loan ratio could further increase to 39%, exceeding the 17% during the Asian financial crisis, posing a significant risk to the financial system.
Goldman Sachs pointed out that by the end of June, the non-performing loan ratio of Hang Seng Bank had risen to 5.32%, reaching a 30-year high. As a result, the target price for Hang Seng has been lowered from 101 Hong Kong dollars to 95 Hong Kong dollars, with a maintained “sell” rating.
Goldman Sachs forecasts that investor confidence in the banking sector will only be restored if there is an improvement in the non-performing loan ratio in commercial real estate. It is expected that the non-performing loan ratio will peak by the end of next year and show improvement by 2026.
The report also indicates that the increase in bad debts at Hong Kong banks will impact profitability, leading to a 5% to 8% downward revision in profit forecasts for the current and next fiscal years. However, the forecast for 2026 is expected to remain unchanged.
According to Goldman Sachs’ analysis, credit losses (ECL) from commercial real estate loans in Hong Kong are expected to rise to 3.5% in the next two years, possibly reaching 9% in a bear market scenario. In evaluating the impact on different banks, it is highlighted that small local banks will be most affected, while Standard Chartered Bank will be least affected. Bank of China Hong Kong has a lower mortgage rate, thus expecting a lighter impact.