How quickly will Hong Kong banks recover from commercial property losses?
Most problem property loans have already surfaced, but risks remain.
Hong Kong banks are expected to face less pressure from commercial real estate in the second half, but analysts said any recovery is likely to be gradual as lenders continue dealing with problem property loans.
Fitch Ratings Ltd. said in a July report that most troubled commercial property loans had been identified as bad loans after years of losses in the commercial property sector.
“Commercial real estate loans have been the main driver of divergence in Hong Kong banks’ asset quality performance in recent years,” the debt watcher said.
Fitch said stress tied to Mainland China's commercial property market first emerged in 2021, whilst weakness in Hong Kong commercial property portfolios became more apparent in 2024. It expects most problem loans to have surfaced by the end of 2025.
The rating company said a more stable economy and a strong initial public offering (IPO) market should help prevent further deterioration in banks' commercial property portfolios.
Jefferies Singapore Ltd. also expects conditions to improve. In a May report, it said a firmer housing market and a healthy IPO pipeline should support loan growth and banks' net interest margins.
Even so, recovery is expected to be slow. Fitch said banks with the biggest exposure to commercial property are likely to continue facing higher credit costs as they sell properties taken over from troubled borrowers.
KPMG International Ltd. likewise identified commercial real estate as one of the banking sector's biggest challenges for the rest of 2026.
“Against this backdrop, banks should maintain prudent risk management and actively monitor exposures within highly leveraged real estate portfolios and vulnerable corporate commercial sectors,” KPMG partners Benjamin Man and Samuel Luk wrote in a report.
Questions to ponder:
- Will the IPO rebound be enough to strengthen bank lending?
- How long will commercial property continue to weigh on bank earnings?
- Which banks remain most exposed to commercial real estate?
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EXPERT OPINION
The IPO revival is offering some relief to banks grappling with commercial real estate challenges – such as recent higher office-space demand from financial services firms. More broadly it is also creating financing opportunities around issuers, investors and the broader capital-markets ecosystem. However, this alone is unlikely to drive a broad-based improvement in lending and should be viewed as one element of a wider opportunity set for Hong Kong banks.
KPMG's latest Hong Kong banking report shows overall credit quality remained manageable last year, tempered by a recovering residential market. However, commercial real estate remains a pressure point: the sector’s gross classified loan ratio ticked up to 2.01% by December, driven by persistent office vacancy and a sluggish retail sector recovery.
Looking ahead, while there are some signs that non-performing loans have been identified by banks, pockets of weakness will remain an ongoing portfolio management issue throughout 2026. While some of the larger banks naturally have larger commercial property lending in absolute terms, that does not necessarily mean they carry the greatest risk. The banks most exposed are generally those most concentrated in property, construction, and investment company lending, particularly where offices or retail assets face persistent vacancy or valuation pressure.