By Ka Sing Chan

Hang Seng Bank’s 11 potential sale of some bad assets has become the talk of Hong Kong’s financial elite. The financial institution 63%-owned by HSBC HSBA may sell a $1 billion loan portfolio backed by assets of stressed property developers, Bloomberg reported on Wednesday, citing sources. If such a deal were to materialise, it would suggest the bank is resisting pressure to treat developers with kid gloves and instead sticking with a normal and necessary process for a market reset.

A 30% slide in the city’s property prices since 2021 has, unsurprisingly, bruised even the most prudent lenders. When departing CEO Diana Cesar took charge of Hang Seng in 2021, only 1.04% of its loans were non-performing. The figure has since soared to 6.69%. Up to 88% of its HK$123 billion ($15.8 billion) commercial property portfolio is classified as having a “significant increase in credit risk” or worse.

The small deal would be a good way for Hang Seng to test its options for cleaning up the mess. Incoming CEO Luanne Lim, a Singapore native, may be more willing to take tougher action against the city’s tycoons to protect the bank’s balance sheet, but it will remain a delicate task.

The city’s financial secretary, Paul Chan, is among those piling pressure on banks to be lenient on local businesses. A real estate industry association went so far as to openly call for the government to set up a HK$20 billion bailout fund for distressed developers. Meanwhile, some banks aren’t seizing pledged assets or recalling loans on worries about a potential domino effect it could have on a property market that is yet to find a bottom. Such developments came amid reiterations by the Hong Kong Monetary Authority, the de facto central bank, that the finance hub’s banking system is healthy.

A loan sale by Hang Seng Bank could help reinforce that. Such disposals are standard practice. They put soured assets into the hands of specialist new owners who are often more successful at recovering some value. And they free up space on the lenders’ balance sheet, allowing them to make new, and hopefully better, loans. Assuming there is no broader crisis on the horizon, it’s a far better way than favours and bailouts for a troubled market to find the bottom and improve.

CONTEXT NEWS

Hang Seng Bank is seeking to sell a property-backed loan portfolio worth at least $1 billion, Bloomberg reported on September 17, citing people familiar with the matter.

Commercial property loans classified as “Stage 2” and “Stage 3”, which imply “significant increase in credit risk has been experienced” or worse, according to Hang Seng Bank’s latest annual report, climbed 88% to HK$92 billion ($11.8 billion) by June, up from HK$49 billion in December.

On September 4, HSBC, which controls Hang Seng Bank, announced that Luanne Lim, currently HSBC’s Hong Kong CEO, will replace Diana Cesar as Hang Seng Bank’s CEO. The non-performing loan ratio at Hang Seng Bank soared to 6.69% at the end of June, up from 1.04% in 2021 when Diana Cesar took office.