Rating agency Fitch Ratings stated that the Hong Kong Monetary Authority recently lowered the base rate by 50 basis points to 5.25%, and is expected to further lower it to reflect the anticipated monetary easing policy in the USA, which will benefit borrowers, real estate developers, and homeowners. However, for many people, the relaxation of funds can only provide mild relief.

Following the first 50 basis point rate cut by the Federal Reserve in the USA to 5%, Fitch Ratings expects the US policy rate to be lowered by another 150 basis points by the end of 2025, and by another 50 basis points in 2026. As the Hong Kong dollar is pegged to the US dollar, Fitch Ratings expects Hong Kong's base rate to be lowered by the same magnitude. As a better indicator of commercial borrowing costs, the Hong Kong Interbank Offered Rate (HIBOR) should follow the base rate cut, although not entirely. This will improve the financing conditions of stronger entities in Hong Kong's real estate industry. However, their financing channels are generally robust. For example, Swire Properties (01972.HK) (A/Stable) raised 3.5 billion RMB in September 2024 with a 3.1% coupon rate (due in 2027) and a 3.4% coupon rate (due in 2029).

In addition to Fitch's rating portfolio, smaller Hong Kong developers may not have the same level of financing channels. Due to pressure on rents and property valuations, the rate cut may have a relatively small overall easing effect on them in the next one or two years. At the same time, residential property sales may benefit from rate cut expectations, supporting developers in generating cash flow, but the extent and sustainability of the housing demand recovery remain unclear.

As expected by Fitch Ratings, the performance of major Hong Kong banks disclosed in the first half of this year generally shows deteriorating credit quality in local commercial real estate (CRE). Despite the rate cut, Fitch predicts that the non-performing loan ratio related to Hong Kong commercial real estate will further worsen in the short term, as the mismatch in cash flows of property-focused enterprises (especially those focusing on office and retail trade) is unlikely to improve substantially soon.

Due to Hang Seng Bank's (00011.HK) (AA-/Stable/a) CRE risks in Hong Kong, its non-performing loan ratio reached 5.3% at the end of the first half of the year. Although Hang Seng Bank's issuer default rating has been confirmed due to the strong support from its parent company, Hongkong and Shanghai Banking Corporation Limited (AA-/Stable/a+) and its parent company HSBC Holdings (00005.HK) (A+/Stable/a+), its standalone viability rating has been downgraded from 'a+' to 'a'.

Fitch Ratings expects that controlled credit costs, interest income locked in from longer-term fixed income portfolios, gradual loan growth, and robust non-interest income will help alleviate the profit pressure on banks caused by the decrease in net interest margin due to rate cuts. Non-interest income has recently benefited from strong outward investments from China, based on the interest rate differential between China and major offshore markets, Fitch Ratings expects this situation to continue in the short term.