HONG KONG: Hong Kong-listed banks will be hard pressed to improve their net interest margins (NIM) this year and expanding their exposure to the mortgage market will help them oddset narrowing margins, a senior executive of global professional services firm KPMG said yesterday.

Simon Gleave, KPMG's partner in charge of financial services practice in China's mainland and Hong Kong, said locally-listed banks may accelerate their forays into the mortgage market because the quality of local properties is better relative to other form of investments.

He said listed banks may also opt to hold more government bonds instead of risky assets, but this move will make it difficult for them to expand their NIM this year.

In Hong Kong, retail-orientated banks' NIM - or the difference between interest income and interest paid out - fell to 1.84 percent in 2008 from 1.9 percent in 2007.

Interest spread between prime and inter-bank rates started to narrow down in the second half of 2008, as inter-bank rates sharply rose in the third quarter after the collapse of Lehman Brothers in September.

In the fourth quarter, both prime rates and inter-bank rates fell to historical lows, depressing NIMs of local banks.

Volatility in global equity markets and an unfavorable investment sentiment also led to a decline in the sales of investment products.

Net fee and commission income of Hong Kong-listed banks fell by 11.7 percent as demand for wealth management products decreased last year, KPMG said.

The territory's listed banks wrote down debt and equity investments by HK$25.5 billion in 2008, in addition to at least HK$7.7 billion booked in 2007. However, Gleave believes banks have already written down and sold most of their risky assets.

Among the mainland listed banks, the impairment write-down on investments jumped to 62.5 billion yuan last year from 23.4 billion in 2007, as the global financial crisis expanded.

Gleave, however, said KPMG takes a view that impairments will fall this year as the global financial market gradually improves.

Listed banks on the mainland registered a strong growth of 30.6 percent in net profit after tax, compared with a 34.2 percent slump in Hong Kong.

The one-year benchmark deposit rate was cut by 189 basis points to 2.25 percent in 2008, while the lending rate was also reduced 216 basis points to 5.31 percent. As lending rates fell faster than deposit rates, the net interest spread on the mainland also came under pressure.

Walkman Lee, an executive at KPMG's financial services practice in Hong Kong, said he expects interest rates on the mainland to increase in the second half of this year.

(HK Edition 05/06/2009 page16)