Hong Kong banks face more property losses as values fall

Property development and investment loans have fallen 15% since end-2022.

Hong Kong banks will continue to face losses from commercial property loans over the next two years as falling property values weaken the assets backing them, forcing lenders to keep more money aside for potential losses.

“In light of the Hong Kong property market condition, we think the banks will likely continue facing collateral value erosion and maintain elevated credit impairment charges for the coming one to two years,” Will Hau, an analyst at S&P Global Ratings Singapore Pte. Ltd., said in an emailed reply to questions.

Hau does not expect credit losses to surge over the next two years, although lower net interest margins could weaken bank profits.

Commercial property loans could cause fewer losses in the second half, but banks would take longer to resolve loans that are already in trouble, Alicia Garcia-Herrero, chief economist for the Asia-Pacific region at Natixis Corporate and Investment Banking, told Asian Banking & Finance.

“Distressed sales, office oversupply, and weak rents keep credit costs above historic norms,” she said. “Earnings relief will be gradual, not a clean turn.”

Smaller lenders with greater exposure to lower-quality commercial properties are more vulnerable, Hau said.

Small banks had average common equity tier 1 capital ratios above 22% at the end of 2025, compared with the 7.5% regulatory minimum. S&P defines them as banks with less than $63.73b (HK$500b) in assets.

Here are the rest of the interviews.

Savio Fan
Director, Financial Institutions Ratings
Fitch Ratings

In Fitch’s view, a stronger IPO market could support Hong Kong banks’ earnings and provide additional financing opportunities but is unlikely to drive a broad-based recovery in lending. Credit demand remains closely tied to macroeconomic conditions and the interest rate outlook, with banks likely to maintain a cautious stance amid a rapidly changing external environment. Commercial real estate may continue to weigh on some banks’ earnings in the near term, although related asset quality deterioration should be less severe than in prior years.

For banks with high impaired loan ratios, problem loan resolution is likely to remain gradual, as lengthy collateral disposal and debt restructuring processes, together with weak acquisition demand, continue to pressure valuations. Overall, Fitch expects loan impairment charges for Hong Kong banks to trend down from previous years.

Benjamin Man
Partner, Financial Services, Hong Kong SAR
KPMG China

The IPO revival is offering some relief to banks grappling with commercial real estate challenges such as recent higher office-space demand from financial service firms. More broadly, it is also creating financing opportunities around issuers, investors, and the broader capital market ecosystem. However, this alone is unlikely to drive a broad-based improvement in lending and should be viewed as one element of a wider opportunity set for Hong Kong banks.

KPMG's latest Hong Kong banking report shows overall credit quality remained manageable last year, tempered by a recovering residential market. However, commercial real estate remains a pressure point: the sector’s gross classified loan ratio ticked up to 2.01% by December, driven by persistent office vacancy and a sluggish retail sector recovery.

Looking ahead, while there are some signs that nonperforming loans have been identified by banks, pockets of weakness will remain an ongoing portfolio management issue throughout 2026. While some of the larger banks naturally have larger commercial property lending in absolute terms, that does not necessarily mean they carry the greatest risk.

The banks most exposed are generally those most concentrated in property, construction, and investment company lending, particularly where offices or retail assets face persistent vacancy or valuation pressure.

Alicia Garcia-Herrero
Chief Economist, Asia Pacific, 
Natixis Corporate and Investment Banking

Hong Kong’s IPO revival has restored fee income, but it is a thin substitute for balance-sheet growth. Loan demand remains cautious outside a few corporates and mortgages, while banks stay selective after years of contraction. Capital-markets activity does not repair collateral values or refinance stressed property books. Lending is likely to stay modest until credit risk, not just listings, clearly improves.

New impairments may ease in the second half of 2026, but resolution of existing CRE problem loans will be slow. Distressed sales, office oversupply and weak rents keep credit costs above historic norms. Collateral work-outs can stretch well into 2027, especially where valuations have already fallen sharply. Earnings relief will be gradual, not a clean turn.

In Hong Kong, Hang Seng, Bank of East Asia and Bank of China (Hong Kong) still carry heavier property and mainland CRE concentrations. Among large U.S. lenders, Wells Fargo retains a sizable CRE book; many regionals sit far above large-bank ratios. Institutions concentrated in office, retail and construction remain the most vulnerable if values slip further. Diversified global banks are better buffered, not immune.

Will Hau
Analyst
S&P Global Ratings

Some opportunities may arise for banks due to a rebound in IPOs in Hong Kong, such as margin financing. At the same time, we think a more sustained growth in bank lending remains contingent on Hong Kong’s macroeconomic growth outlook including cross-border trade activities. We also believe a more accommodative and predictable interest rate environment would stimulate credit demand for both corporate and retail borrowers.

Hong Kong’s commercial property sector is experiencing a fragmented stabilization rather than a full recovery.

In light of the Hong Kong property market condition, we think the banks will likely continue facing collateral value erosion and maintain elevated credit impairment charges for the coming one to two years.

Hong Kong banks have reduced their commercial property exposures and built in additional provisioning in the past several years. As of end-June 2026, banks have cut their nonresidential property development and investment loans by an estimated 15% since end-2022, representing about 7% of the system’s total loans, down from 9% in 2022. We estimate the credit loss rate for the banking system at 60 basis points (bps) for 2026-2027 compared with 55-59 bps during 2023-2025.

We foresee slightly weaker overall probability for Hong Kong for the coming two years mainly given the lower net interest margin outlook. But we think the banking sector in general remains resilient overall, supported by their strong capitalization and stable funding and liquidity profiles. At the same time, we don’t expect any surge in credit loss in the coming two years even under a moderately unfavorable economy.

—With reporting from Olivia Tirona and Shiena Sur