macroeconomic conditions and banking performance in ......macroeconomic conditions and banking...

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)

14

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 +=


15



• 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.


16



• 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)

18

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

22

• 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.

macroeconomic conditions and banking performance in ......macroeconomic conditions and banking...

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