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Hong Kong banks carried noticeably higher credit risk into 2025 as the commercial real estate downturn and higher interest rates put pressure on businesses, causing corporate exposures to drive up non-performing loans and expected credit loss.

The Hong Kong Monetary Authority notes that the banking sector has sufficient provisions and maintains financial strength to withstand market volatility and sector-wide credit risks. However, banks with larger loan portfolio exposure to the Hong Kong CRE sector have reported alarming NPL ratios and concerning changes in their loan portfolio structure. This is particularly evident in the credit metrics of Hang Seng Bank, HSBC’s local lender.

This report examines the current situation of Hong Kong’s banking sector, with a particular focus on Hang Seng and potential solutions to address banks’ NPL levels.

Commercial real estate downturn feeds through banks’ asset quality

Hong Kong's CRE market has remained under pressure for years and in 2024 the overall office vacancy rate reached a historic high of 16.3%, while Grade A office rents fell 8.6% for the year.