-
Macroeconomic Conditions and Banking Performance in Hong Kong:
A Panel Study
HONG KONG MONETARY AUTHORITY Overview
2
• Use supervisory bank-level data to examine the impact of the macroeconomy on individual banks in HK.
– Annual data on 29 retail banks between 1994-2002.
– Banks small, medium-sized or large.
• Focus on determination of:– Net interest margin (main determinant of profitability).
– Asset quality.
Major Findings
3
• Bank profitability in Hong Kong declined following the Asian financial crisis.
– Macroeconomic factors matter.
• The reduced profitability was also related to increased competition.
• Smaller banks generally more exposed.
• Property loans “relatively” safe.
Macroeconomic Indicators
4
-8
-4
0
4
8
12
16
-40
-20
0
20
40
60
80
1994 1995 1996 1997 1998 1999 2000 2001 2002
re a l GD P grow th (LH S) 3-month H IB O R (% p.a .) (LH S) unemployment ra te (LH S) C P I infla tion (LH S) property prices (R H S)
(% yoy) (% yoy)
Asian Financial Crisis led to sharp fall in GDP,a spike in HIBOR and start of deflation.
1995 1996 1997 1998 1999 2000 2001 2002
-6
-4
-2
0
2
4
6
8
10
%
Inflation Real GDP Hibor 3M
This lead to collapse of property prices and increasedNPLs, but banks have remained profitable.
1995 1996 1997 1998 1999 2000 2001 2002
-40
-30
-20
-10
0
10
20
30
40
Property prices (%) NPLs (% of TL) Profitability x 10 (% of TA)
-
Market Concentration and Competition
7
.120
.122
.124
.126
.128
.130
.132
0
1
2
3
4
5
6
7
1994 1995 1996 1997 1998 1999 2000 2001 2002
Herfindahl-Hirschman Index (LHS)mortgage lending spread (RHS)
(%)
Decomposition of Profitability (1)
8
• Bank profitability can be decomposed into:
– where
– NIM = NI/TA key variable
TAPROV
TAOV
TANII
TANI
TABTP
−−+=TA: total assetsBTP: before tax profitsNI: net interest incomeNII: non-interest incomeOV: overheadsPROV: loan loss provisions
Decomposition of Profitability (2)
9
0.0
0.5
1.0
1.5
2.0
2.5
3.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
1994 1995 1996 1997 1998 1999 2000 2001 2002
profitabilityNIMNII/T A
OV/T AP ROV/T A
(% to total assets) (% to total assets)
Profitability and Bank Size
10
0.4
0.8
1.2
1.6
2.0
0.4
0.8
1.2
1.6
2.0large banks medium-sized banks small banks
Full sample 1994-97 1998-2002
(%) (%)
NIMs and Bank Size
11
1.8
1.9
2.0
2.1
2.2
2.3
2.4
2.5
2.6
1.8
1.9
2.0
2.1
2.2
2.3
2.4
2.5
2.6large banks medium-sized banks small banks
Full sample 1994-97 1998-2002
(%) (%)NPLs and Bank Size
12
0
1
2
3
4
5
6
7
8
0
1
2
3
4
5
6
7
8large banks medium-sized banks small banks
Full sample 1994-97 1998-2002
(%) (%)
-
Non-interest Income Net of Operating Cost
13
-0.4
0.0
0.4
0.8
1.2
1.6
2.0
-0.4
0.0
0.4
0.8
1.2
1.6
2.0large banks m edium -sized banks sm all banks
Full sam ple 1994-97 1998-2002
(% ) (% )
Empirical Framework (1)
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t,it,ittt,i error)BANK,FIN,MACRO(gNIM +=t,it,ittt,i error)BANK,FIN,MACRO(fNPL +=
MACRO: macroeconomic variables FIN: financial variablesBANK: bank characteristics
• Follow Demirgüç-Kunt and Huizinga (1999, 2000). • NPLs and NIMs given by:
• Explanatory variables:– Lagged dependent variable.
– Macroeconomic variables: INF, GDP, HIBOR, PROP.
– Bank variables: size.
t,it,ittt,i error)BANK,FIN,MACRO(fNPL +=
t,it,ittt,i error)BANK,FIN,MACRO(gNIM +=
Empirical Framework (2)
15
t,it,ittt,i error)BANK,FIN,MACRO(gNIM +=t,it,ittt,i error)BANK,FIN,MACRO(fNPL +=
MACRO: macroeconomic variables FIN: financial variablesBANK: bank characteristics
• Panel regression with fixed effects:– Cross-sectional dimension large relative to time-sries
dimension.
• N = 29, T = 9
– Raises technical issues regarding choice of estimation procedure.
• Disregard in this draft -- more work is needed.
Empirical Framework (3)
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t,it,ittt,i error)BANK,FIN,MACRO(gNIM +=t,it,ittt,i error)BANK,FIN,MACRO(fNPL +=
MACRO: macroeconomic variables FIN: financial variablesBANK: bank characteristics
• To differences across banks, interact macroeconomic and bank-specific variables:
– Interact macroeconomic variables with bank size.
• Do small banks differ?
– Interact changes in property prices with the share of lending to the property sector in NPL regression.
• Are property related loans more or less risky than other loans?
• Let X(t) and ω denote property loans and fraction of loans to property sector.
• Are property loans more/less sensitive to X(t)?NPL(t) = β(1-ω)X(t) + δωX(t) +...
– β,δ < 0: impact on non-property and property loans
NPL(t) = βX(t) + (δ-β)ωX(t) +...
• Term (δ-β) captures rel. riskiness of property loans:– (δ-β) < 0 implies that δ < β < 0 -- prop. loans more risky
– (δ-β) > 0 implies that β < δ < 0 -- prop. loans less risky
Panel Regressions: NPL(Sample: 1995-2002)
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Variable\Reg. 1 2 3 4GDP -0.15** 0.59 0.81** 0.82**GDP*SIZE -0.04* -0.05** -0.05**PROP -0.02** 0.03 -0.13** -0.12**PROP*SIZE 0.00PROP*PROPSHARE
0.19** 0.20**
INF -0.30** -0.82* -0.50* -0.32*INF*SIZE 0.03 0.01HIBOR 0.57** 1.14 0.83 0.58**HIBOR*SIZE -0.03 -0.01Lagged NPL 0.36** 0.36** 0.33** 0.34*Adj. R-sq. 0.89 0.91 0.94 0.92No. obs. 209 209 209 209
Note: */** denotes significant at the 5/1% level.
-
30
40
50
60
70
0 1 2 3 4 5 6 7 8 9
Prop
erty
rela
ted
lend
ing
(% o
f tot
al lo
ans)
NPLs(% of to tal loans)
Panel Regressions: NIM(Sample: 1995-2002)
20
Variable\Reg. 1 2 3 4GDP 0.02** 0.02** 0.14** 0.12**GDP*SIZE -0.01** -0.01*PROP 0.00INF 0.01* 0.01* 0.15** 0.15**INF*SIZE -0.01** -0.01**HIBOR 0.01 0.04** 0.73** 0.59**HIBOR*SIZE -0.04** -0.03**HIBOR*EQUITY 0.18*NII -0.01*NIEXPENSE 0.60** 0.56** 0.58** 0.55**PROP SHARE 0.00CONS SHARE -0.00Lagged NIM 0.39** 0.38** 0.30** 0.27**Adj. R-sq. 0.97 0.96 0.98 0.98No. obs. 232 232 232 232
Note: */** denotes significant at the 5/1% level.
Importance of Bank Size
Equation: NPL NIM
Impact of:
Bank size:
GDP GDP Inflation HIBOR
Large -0.18 0.01 0.00 -0.01
Medium -0.08 0.02 0.01 0.05
Small -0.03 0.03 0.02 0.08
Conclusion
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• Macroeconomic developments and financial conditions affect banking performance.
• Smaller banks are more exposed to changes in economic conditions.
• Property related lending is less risky than other types of loans.
