HSBC intends to strengthen risk management at its Hong Kong subsidiary Hang Seng Bank as a result of concerns about a possible increase in bad loans in the face of escalating economic challenges and the property sector crisis in China, according to a Reuters reports quoting information from two persons with knowledge of the situation.

According to the persons, Hang Seng’s senior executives would participate in conversations about corporate, retail, wealth, and private banking in the Asia-Pacific region more closely than before.

The move coincides with HSBC’s shift towards Asia and the economic unrest in China, the world’s second-largest economy, where developer debt defaults and a stock market meltdown have raised questions about the soundness of the financial sector.

In recent quarters, exposure to the mainland real estate market, which has lurched from crisis to crisis since 2021, has increased Hang Seng’s bad loan percentage.

According to one of the persons, the idea to share knowledge and best practices between Hang Seng and HSBC Asia Pacific’s risk management divisions is still being discussed but is probably going to happen this year.

Because the situation is private, both individuals declined to be identified.

“HSBC recognises the importance of a strong risk culture. Active risk management helps us to achieve our strategy, serve our customers and communities and grow our business safely,” said a spokesperson for the bank.

“HSBC Group entities stand to benefit from the strengths of the Group.”

“A robust risk governance in place to ensure healthy operations of the bank,” according to a Hang Seng Bank representative. Regarding strengthening relationships with HSBC to reduce risk, the bank declined to comment.

Concerns over the vulnerability and resiliency of international financial institutions and affiliates, as well as the impact on their balance sheets, have been raised by the slowing Chinese economy, the ongoing property sector crisis, and the local government’s financial difficulties.

Although the property crisis has negatively impacted peer Standard Chartered’s earnings, Noel Quinn, the CEO of HSBC, stated in November that his bank was “well provisioned” against real estate losses in China.

At its 2023 interim earnings, Hang Seng, which is 62% owned by HSBC, revealed a rise in the non-performing loan ratio, which was brought on by a drop in gross loan amount and further bad credit downgrades.

According to its January-June financial report, its gross impaired loans and advances ratio was 2.85% as of June-end, up from 1.92% in the same time last year and 2.56% at the end of 2022.
HSBC has increased its focus on Asia and reduced its involvement in less lucrative ventures outside.
In contrast to other foreign companies and investors who have refrained or even left the nation, it pledged to investing $3.5 billion in the region in 2021 in order to increase market share in banking, insurance, and securities.

While Hang Seng receives practically all of its revenue from Hong Kong and mainland China, the London-headquartered bank receives more than half of its pre-tax profit from these two regions and maintains a sizable presence throughout the rest of the region.

According to one of the sources, Hang Seng’s senior executives would take part in HSBC Asia Pacific’s risk management meetings on a regular basis to talk about important market developments and business-specific challenges.

According to a recent HSBC analysis, the national, regional, and group-level risk management meetings facilitate focused insight and discussion of gaps in risk appetite and mitigation action.

According to HSBC’s 2022 annual report and accounts, the strategy enables risk to be “promptly identified and mitigated, and informs risk-adjusted remuneration to drive a strong risk culture”.
According to one of the persons, Hang Seng’s closer engagement will also facilitate the sharing of information about regulatory or other events in key Asian markets that may affect the Hong Kong unit.

“The growing economic challenges and rapid regulatory changes make it imperative for banks, even those that have limited geographical focus, to have the ability to get much wider read-across,” said the person.

“It will be a win-win for both HSBC and Hang Seng.”

(Adapted from Reuters.com)