Investment writedowns in the second half by Hong Kong-listed banks, which have already set aside over HK$8.22 billion to match lower asset value, will depend on the US credit market recovery, KPMG said yesterday.

Writedowns have diluted earnings in Hong Kong-listed banks, which reported overall a 6.4 percent drop in net profits after tax in the first six months this year, despite a 15.4 percent growth in net interest income during the period.

The writedowns were significant in terms of the HK$47.8 billion total interim net income. "Whether the banks need to set aside more in the future will entirely depend on the US financial market and the banks' exposure to subprime-related products," said Martin Wardle, a partner at KPMG's financial services practice.

"The subprime crisis hasn't been completely unraveled, and financial assets are still impacted by distressed credit market," he told reporters at a press conference.

KPMG thinks the writedowns by the city's publicly traded banks are "enough". However, the remaining ABS (asset-backed securities), CDO (collateralized debt obligation) and SIV (structured investment vehicles) portfolio in those firms totaled HK$18.1 billion.

Law Ka-chung, chief economist at Bank of Communications, said among the Hong Kong-listed banks, mainland banks would have bigger challenges than their Hong Kong counterparts, amid the falling property market and unbalanced interest rate cut.

"Mainland banks had for years aggressively expanded their portfolio in property sectors, so now many home buyers on the mainland face default risks as the housing prices keep falling sharply," Law said.

Mainland's monetary regulations, which made the interest rates cut in loans outpace those in deposits, are also set to squeeze banks' income, he said.

That might wipe off some of mainland banks' earnings in the first half, which have seen 67.3 percent growth in net profits. The strong result was due to a reduction of the domestic income tax rate, from 33 percent to 25 percent effective this year.

First-half writedowns on investment by mainland banks reached approximately 17.7 billion yuan as a result of the global credit market woes, KPMG said.

According to the firm's statistics, net fee and commission income in Hong Kong-listed banks increased 13 percent, lower than previous record as initial public offering and stock brokerage activities slowed down. Total operating income rose by 8.9 percent.

The growth in loan books for listed banks was generally broad-based. Mortgages grew 7.6 percent as property prices rose and commercial loans grew by 2.2 percent. Loans for use outside Hong Kong also rose by 52.3 percent.

"Lenders should remain cautious of the global credit crisis, inflationary pressure and softened growth in the mainland economy, despite healthy delinquency statistics in Hong Kong," said Wardle.

(HK Edition 09/23/2008 page2)