commit a4f160311cffb5ac75cbc499b2fcecb6fb3e8bb2 Author: jacquesmarmion Date: Thu Aug 28 12:06:37 2025 +0300 Add Credit Risk Management Of Commercial Real Estate Exposures diff --git a/Credit-Risk-Management-Of-Commercial-Real-Estate-Exposures.md b/Credit-Risk-Management-Of-Commercial-Real-Estate-Exposures.md new file mode 100644 index 0000000..446057f --- /dev/null +++ b/Credit-Risk-Management-Of-Commercial-Real-Estate-Exposures.md @@ -0,0 +1,15 @@ +
The Hong Kong [Monetary](https://www.22401414.com) Authority (HKMA) released today the classified loan ratio of the banking sector at the end of the second quarter. The ratio was 1.97%, broadly similar to 1.98% at the end of March. As I have discussed on different occasions, the classified loan ratio continues to face upward pressure, primarily driven by commercial genuine estate (CRE) loans. Pressures in global CRE (including retail residential or commercial properties and offices) coming from the rise of e-commerce and remote work in current years are also evident in Hong Kong. An increase in workplace completions has also resulted in continuing adjustments in the rates and leas of CRE in Hong Kong during the first half of 2025. Moreover, the high rate of interest environment over the previous few years has actually worsened the debt-servicing problem of industrial residential or commercial property designers and financiers, drawing market attention and raising questions on the capability of banks to efficiently handle the relevant danger direct exposures and [financial stability](https://realestatebcd.com) threat. I intend to clarify these [questions](https://assignmentlistings.ca) here.
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Standing together with business
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CRE costs and leas are currently under pressure from numerous aspects, including rates of interest and market supply and demand characteristics, which have actually led to a decline in the worth of loan collateral. Borrowers are understandably fretted regarding whether banks will demand instant payment. To address this, the HKMA and the banking sector have consistently emphasised that while the fall in regional residential or commercial property rates and rents in the last few years have resulted in a down modification to the independent residential or commercial property evaluations, banks think about a host of elements when reviewing credit limits, including the customer's credit demand, overall financial position and payment capability. Banks will not adjust a [credit limitation](https://michiganhorseproperty.com) simply due to a change in the value of the residential or commercial property security.
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There have also been misunderstandings that landlords might refuse to adjust rents in action to market conditions or perhaps leave residential or commercial properties vacant out of issue over banks requiring loan repayments. However, this does not line up with banks' real practices, and is also not logical from a danger management angle. In reality, banks have actually previously made it clear that they would not require immediate payment solely due to a decrease in rental income. This pragmatic and flexible technique shows banks' willingness to stand together with business, in addition to their position and commitment to ride out hard times with the neighborhood.
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If a customer in temporary financial trouble breaches the terms of the loan covenant, will it cause the bank requiring instant repayment? The answer is not necessarily so. In practice, banks will initially negotiate with the debtor, for instance, by changing the payment strategy such as the loan tenor. Banks will take appropriate credit actions just as a last resort to safeguard the soundness of their operations and the interest of depositors.
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Protecting banking stability and depositor interests
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The public might hence question if banks' assistance for business will come at the expense of banking stability and depositor interests. There is no requirement to fret as the HKMA has actually been carefully keeping an eye on the overall healthy advancement of Hong Kong's banking sector. We believe that the credit danger associated with CRE loans is [manageable](https://fortressrealtycr.com). A [considerable](https://vreaucazare.ro) portion of Hong Kong banks' direct exposures connecting to regional residential or commercial property development and financial investment loans are to the big gamers with reasonably good monetary health. For exposures to small and medium-sized regional residential or commercial property [designers](https://housersinmobiliaria.com) and financiers, including some with weaker financials or greater gearing, banks have currently taken credit danger mitigating steps early on, and most of these loans are secured. Besides, there is no concentration threat at private customer level.
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A current media report highlighted the threats associated with CRE loans, with a particular focus on the accounting of banks' "expected credit losses". In reality, this is merely a calculation based upon modelling for accounting functions. Loans categorized as "anticipated credit losses" do not always represent bad financial obligations, and for that reason can not be used as a basis for an extensive evaluation of banks' asset quality.
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Similarly, some other commentaries have actually focused entirely on banks' classified loan ratios, which provides a somewhat limited point of view. Hong Kong has gone into a credit downcycle over the last few years, having actually been impacted by factors like macroeconomic adjustment and rates of interest level. This has actually naturally resulted in a boost in the classified loan ratio of the banking sector. While the classified loan ratio has gradually returned to the long-term average of around 2%, from 0.89% at the end of 2021, the ratio stays far listed below the 7.43% seen in 1999 after the Asian Financial Crisis.
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To gain a thorough [understanding](https://dentalbrokerflorida.com) of credit quality, one can think about the following widely and long-used indications:
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- The very first [fundamental indicator](https://mckenziepropertiestrnc.com) is the capital adequacy ratio: The healthy development of the banking sector includes building up capital throughout the growth stage of the credit cycle, such that when the [credit cycle](https://reswis.com) changes and we see credit costs go up and a deterioration in possession quality, banks would have sufficient capital to absorb the credit expenses. Banks in Hong Kong have ample capital - the Total Capital Ratio for the banking sector stood at 24.2% at the end of March 2025, well above the worldwide minimum requirement of 8%. +- The second key indication is the arrangement protection ratio: When assessing non-performing loans, the essential concern is whether the relevant losses will impact a bank's core structure. The arrangement protection ratio is used to determine if the provisions for non-performing loans are enough. If a bank adopts sensible threat management and its arrangement coverage ratio stays above 100% after deducting the worth of collateral from the non-performing loans, it means that the potential losses from non-performing loans have actually been effectively shown in the bank's provisions. For the Hong Kong banking sector, arrangements suffice, with the arrangement protection ratio (after subtracting the value of security) standing at about 145% at the end of March 2025. +- The 3rd sign is undoubtedly financial strength: Despite the higher spotlight on non-performing loans, one important criterion when assessing a bank's soundness is whether the bank can preserve good financial strength and its profit design can be sustained after deducting credit costs. In this regard, Hong Kong's banking system taped profit growth in the last three consecutive years even after considering the expenditures for expected credit losses. The general pre-tax operating revenue of retail banks increased by 8.4% year-on-year in 2024, and by 15.8% year-on-year in the first quarter of 2025, demonstrating sound monetary strength.
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These three essential indications reveal that Hong Kong's banking system is well-capitalised and has adequate arrangements and great monetary strength to endure market volatilities. In the face of a still-challenging macroeconomic environment, the credit risks faced by the banking sector have actually increased recently, yet the earnings models of banks have not been affected. I would likewise like to take this opportunity to clarify the earlier "bad bank" rumour. The facility of a "bad bank" is an amazing measure which would only be considered when banks have very severe balance sheet problems. This is totally inconsistent with the present scenario of banks in Hong Kong, which are in a sound way with strong monetary strength.
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Hong Kong's banking sector has securely cruised through the 1998 Asian Financial Crisis, the 2008 Great Financial Crisis, the few years following the Covid-19 pandemic along with the 2023 banking chaos in the US and Europe, showing its strength and resilience. Although the global financial outlook undergoes various uncertainties and numerous industries have actually been significantly impacted, the [banking](https://efraimnegociosimobiliarios.com.br) sector has stayed supportive to customers in troubles and has been riding out obstacles with them, one crisis after another. This is a testament to both the ability and dedication of the banks to weather difficult times with the community. The HKMA, together with the banking sector, will continue to do their utmost to support the advancement, upgrade and change of the genuine economy.
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