Property and transport loans drag down Public Bank HK’s profits

Minibus and taxi licenses made up over 40% of PBHK’s loans.

Exposure to Hong Kong and China’s property and transport-related loans will weigh on Public Bank (Hong Kong) (PBHK), with Moody’s Ratings warning of further asset quality deterioration.

PBHK is expected to face higher credit costs, which will strain the bank’s profitability.

“We foresee that the asset risk in the bank's loan portfolio will remain high due to the group's inherent exposure to the property sector. This exposure is primarily through its loans for property investment and development, as well as loans for the purchase of minibus and taxi licenses,” Moody’s said in its latest ratings commentary of the bank.

Whilst the ratings agency affirmed the bank’s a3 long-term and short-term local and foreign currency deposit ratings, it highlighted elevated risks for PBHK.

Factors contributing to this include the challenging property market conditions in Hong Kong, the decline in the value of minibus and taxi licenses, and higher default rate associated with unsecured personal loans.

Minibus and taxi licenses made up 43.8% of PBHK’s gross loans in Hong Kong.

“The loss given default is also likely to rise if the value of minibus and taxi licenses continues to soften and the property downturn prolongs in Hong Kong, depressing collateral values,” Moody’s warned.

The bank's impaired loan ratio rose to 3.68% at end-2023, a jump from just 1.2% at end-2022. Impaired loan coverage ratio was 38.8% at December 2023.

Profitability is expected to remain lower than its historical average, at between 0.3% to 0.4% in terms of net income to tangible assets.

“Higher credit costs and a lower net interest margin over the next 12-18 months will pressure its profitability, partially offset by better returns from its fixed income investments,” Moody’s said.

On a more positive note, PBHK is said to have sound capitalisation, low reliance on market funds, and moderate liquidity. These three will provide PBHK a buffer against its worsening profitability and asset quality, according to Moody’s.