Tuesday, October 14, 2008

Can higher interest rates attract
more deposits into Hong Kong banks?


Bank of East Asia, Hong Kong's third-biggest by assets, and smaller competitors are offering depositors interest rates as much as 17 times higher than HSBC Holdings as the credit crisis drives funding costs higher.

Bank of East Asia, Wing Hang Bank and Dah Sing Banking Group are offering rates as high as 4.3375 percent for one-month time deposits, according to their Web sites. That compares with 0.25 percent at HSBC, Hong Kong's largest bank by deposits.

Money market rates are rising as the deepening global financial crisis makes banks reluctant to lend to each other, increasing the importance of deposits as a source of funding. Rumors questioning Bank of East Asia's stability last month led to Hong Kong's first bank run in more than a decade.

“The banks can increase their net interest margin” by drawing more deposits, said Kenny Tang, director of Tung Tai Securities in Hong Kong, referring to lending profitability. The higher savings rates are likely to attract investors seeking safe-haven options amid the stock market declines, he said.

Bank of East Asia dropped 3.4 percent to close at HK$20.15, paring earlier losses. Wing Hang fell 0.5 percent to HK$43.70 while the local benchmark Hang Seng Index declined 8 percent. Stocks across Asia tumbled on Oct.10 driving a regional benchmark toward the biggest weekly drop since it was created almost 21 years ago.
The Hong Kong Monetary Authority on Oct. 9 cut its base rate by 150 basis points to two percent. That didn't stop the benchmark three-month Hibor from rising one basis point to 4.41 percent on Oct. 10, almost double from Sept. 10. One-month Hibor was 4.99 percent. One basis point is 0.01 percentage point.

The interbank rate is the rate at which banks bid for and offer deposits to each other.


Loan-Deposit Ratios
Tong Hon Shing, general manager and head of the personal banking division at Bank of East Asia, wasn't immediately available to comment.

The average loan-to-deposit ratio at Hong Kong banks rose to 83.2 percent in August, the highest since December 2005, according to HKMA data.

Bank of East Asia is offering 4.3375 percent for HK$400,000 placed in one-month time deposits, according to its Web site. On Sept. 1, the interest was 1.0675 percent, bank spokeswoman Vera Lung said in an e-mail.

Wing Hang Bank customers get 3.55 percent for one-month time deposit of up to HK$500,000, according to its Web site. HSBC pays 0.25 percent for one-month deposits of less than HK$500,000, its Web site shows.

Fitch Ratings on Sept. 29 cut Bank of East Asia's long-term credit rating outlook to negative from stable after the bank run. Hong Kong Financial Secretary John Tsang had said the rumors were unfounded and malicious and that the bank has enough capital to serve clients. Police arrested an 18-year-old man in the investigation.
HSBC, based in London, had $231.7 billion of deposits in Hong Kong at the end of June. Bank of East Asia had $39.7 billion and Wing Hang and Dah Sing had $15.4 billion and $11 billion, respectively.


Aside from securing higher saving rates, how do banks assure investors and ordinary depositors that their accounts are safe?