Hong Kong banks near end of CRE pain but credit costs linger

A buoyant IPO market in Hong Kong is offering some relief, a market expert said.

Hong Kong banks’ asset quality pressures from commercial real estate (CRE) exposures are likely to moderate in the second half of 2026, according to Fitch Ratings.

Most weak CRE loans have already been recognized as impaired over the past two years, the company said in a July report.

“Even so, resolution of local CRE problem loans will be gradual, with prolonged collateral disposals likely to keep credit costs elevated for the most-exposed banks,” Fitch said.

CRE loan stress first emerged from Hong Kong banks’ mainland China-related exposures in 2021, before extending to local portfolios and other related exposures from 2024.

A more stable macroeconomic environment and continued buoyant IPO market in Hong Kong should help to limit further significant deterioration in local CRE loans, Fitch said.

In an expert opinion by Asian Banking and Finance, a market analyst confirmed that the IPO revival is offering “some relief” to banks.

“More broadly it is also creating financing opportunities around issuers, investors and the broader capital-markets ecosystem,” said Benjamin Man, partner, Financial Services, Hong Kong SAR, at KPMG China.

However, this alone is unlikely to drive a broad improvement in lending, Man said.

Whilst 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, Man said.

“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,” Man said.

Fitch also said that sustained declines in valuations on distressed Hong Kong CRE assets are likely to keep credit costs higher than the historical averages for the most-exposed banks.