How quickly will Hong Kong banks recover from commercial property losses?
Most problem property loans have already surfaced, but risks remain.
Hong Kong banks are expected to face less pressure from commercial real estate in the second half, but analysts said any recovery is likely to be gradual as lenders continue dealing with problem property loans.
Fitch Ratings Ltd. said in a July report that most troubled commercial property loans had been identified as bad loans after years of losses in the commercial property sector.
“Commercial real estate loans have been the main driver of divergence in Hong Kong banks’ asset quality performance in recent years,” the debt watcher said.
Fitch said stress tied to Mainland China's commercial property market first emerged in 2021, whilst weakness in Hong Kong commercial property portfolios became more apparent in 2024. It expects most problem loans to have surfaced by the end of 2025.
The rating company said a more stable economy and a strong initial public offering (IPO) market should help prevent further deterioration in banks' commercial property portfolios.
Jefferies Singapore Ltd. also expects conditions to improve. In a May report, it said a firmer housing market and a healthy IPO pipeline should support loan growth and banks' net interest margins.
Even so, recovery is expected to be slow. Fitch said banks with the biggest exposure to commercial property are likely to continue facing higher credit costs as they sell properties taken over from troubled borrowers.
KPMG International Ltd. likewise identified commercial real estate as one of the banking sector's biggest challenges for the rest of 2026.
“Against this backdrop, banks should maintain prudent risk management and actively monitor exposures within highly leveraged real estate portfolios and vulnerable corporate commercial sectors,” KPMG partners Benjamin Man and Samuel Luk wrote in a report.
Questions to ponder:
- Will the IPO rebound be enough to strengthen bank lending?
- How long will commercial property continue to weigh on bank earnings?
- Which banks remain most exposed to commercial real estate?
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EXPERT OPINION
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.
Will Hong Kong’s IPO rebound be enough to strengthen bank lending?
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.
How long will commercial property continue to weigh on bank earnings?
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.
Which banks remain most exposed to commercial real estate?
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.
The IPO revival is offering some relief to banks grappling with commercial real estate challenges – such as recent higher office-space demand from financial services firms. More broadly it is also creating financing opportunities around issuers, investors and the broader capital-markets 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 non-performing 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.