Yu Weiwen: The credit risk of commercial property loans in Hong Kong is manageable, and the establishment of a "bad bank" is not in line with the soundness of the banking sector.

Recently, the Chief Executive of the Hong Kong Monetary Authority, Eddie Yue, wrote that the specific classification loan ratio of Hong Kong banks at the end of the second quarter was 1.97%, compared to 1.98% at the end of March. The ratio still faces upward pressure, with one major reason being commercial real estate credit. He emphasized that the HKMA has been closely monitoring the overall sound development of the Hong Kong banking industry, and believes that the credit risk of commercial real estate loans is manageable. He also pointed out that establishing a "bad bank" is completely inappropriate in the current situation where Hong Kong banks operate soundly and have strong financial capabilities. He noted that in recent years, global commercial real estate (including shops and office buildings) has been under pressure due to the rise of e-commerce and remote work, and Hong Kong is no exception. The increase in office completions has also led to continued adjustments in the prices and rents of Hong Kong commercial properties in the first half of 2025. The high interest rate environment in the past few years has further burdened commercial real estate developers and investors, causing concerns in the market about whether banks can effectively manage related risk exposures and financial stability risks. He mentioned that currently, the prices and rents of commercial real estate are under pressure due to factors such as interest rate levels and market supply and demand. The decrease in mortgage collateral value raises concerns for borrowers about banks demanding immediate repayment. To alleviate doubts, the HKMA and the banking industry have repeatedly emphasized that even if Hong Kong real estate prices and rents have fallen in recent years, resulting in downward adjustments in property valuations, banks will still consider borrowers' credit needs, overall financial conditions, and repayment ability comprehensively when reviewing credit limits, instead of adjusting limits solely based on changes in property collateral values. Banks have made it clear that they will not demand immediate repayment solely due to a decrease in rental income. He also pointed out that if borrowers themselves violate loan agreement terms due to temporary financial instability, banks will first negotiate with borrowers, such as adjusting repayment schemes including loan terms, and will only take appropriate credit actions as a last resort to safeguard the sound operation of banks and the interests of depositors. Eddie Yue stated that the HKMA has been closely monitoring the overall sound development of the Hong Kong banking industry, and believes that the credit risk of commercial real estate loans is manageable. The risk exposure of Hong Kong banks to local property development and investment loans is mostly directed towards large local Hong Kong enterprises with relatively good financial conditions. As for the risk exposure of small and medium-sized property developers and investors, including some with weaker financial conditions or higher debt ratios, banks have already taken credit risk mitigation measures in the past, and most of these loans are secured with collateral. In addition, banks do not have excessive concentration on any single borrower. Furthermore, there have been recent concerns from the media about the risks of commercial real estate loans, focusing on the "expected credit loss" calculated by banks in accounting. However, this calculation method is merely a model designed for accounting purposes, and loans classified under "expected credit loss" do not necessarily represent bad debts, therefore cannot be used as a basis for fully assessing the quality of bank assets. He also believed that some individuals focus too much on the specific classification loan ratio of banks. Influenced by factors such as macroeconomic adjustments and interest rate levels, Hong Kong has entered a credit downturn cycle in recent years, leading to a natural increase in the specific classification loan ratio of the banking industry. Although the specific classification loan ratio has gradually returned to the long-term average level of around 2% from the end of 2021, it remains far below the 7.43% after the ASIA FINANCIAL storm in 1999. According to the three important indicators of capital adequacy ratio, provision coverage ratio, and financial strength, it is evident that the Hong Kong banking system has sufficient capital, adequate provisions, and good financial strength to cope with market fluctuations. Despite facing increased credit risks in recent years due to challenges in the macroeconomic environment, the profit model of banks has not been affected. He also clarified the rumors about the "bad bank" mentioned earlier, stating that establishing a "bad bank" is an extreme measure taken when there are severe issues in a bank's balance sheet, which is completely inappropriate in the current situation where Hong Kong banks operate soundly and have strong financial capabilities.