Hang Seng Bank Says Little Room For Further Rate Cuts

March 05, 2008, 10:28 p.m. EST 2 Min Read

HONG KONG -(Dow Jones)- Hang Seng Bank Ltd. (0011.HK) said Tuesday the lowinterest rate environment in the U.S. won't last, leaving little room forfurther rate cuts in Hong Kong.

The Hong Kong Monetary Authority usually matches the Federal Reserve's rateadjustments to maintain the Hong Kong dollar's peg to the U.S. dollar. Hong Konghas cut its base rate to 4.5% from 6.75% since September to match the Fed's ratecuts.

"I believe the U.S. rate cuts will not persist because of inflationarypressure. Once the current [economic] problems are resolved, the rates will goup again," Chief Executive Raymond Or said at a news conference after the bank's2007 annual results.

The Fed has cut its federal funds rate target by 2.25 percentage points to3.0% in the last six months to help boost confidence in the U.S. economy andfinancial markets that have been affected by a global credit crisis.

The de facto central bank has pledged to keep its base rate fixed at least 1.5percentage points above the federal funds rate.

"There is almost no room for further rate cuts," he said, adding that the bankwill face pressure on its net interest margins if local lenders follow the HKMAin cutting their interest rates further.

While Hong Kong lenders aren't required to follow adjustments in HKMA's baserates, major banks including Hang Seng have, however, cut their prime lendingrates by two percentage points in the last six months. Hang Seng Bank's currentlending rate is 5.75%.

Hang Seng, Hong Kong's third largest lender by assets and 62%-owned by HSBCHoldings PLC (HBC), reported Monday its 2007 net profit rose 52% to HK$18.24billion ( US$2.34 billion), up from HK$12.04 billion in 2006 as a strong localeconomy and buoyant stock market boosted its commissions and fee income.

For this year, Or said wealth management and mainland China operations will bethe bank's main focus for growth.

Hang Seng's wealth management revenue doubled to HK$8.6 billion last year from HK$4.3 billion in 2006.

However, Or said growth for the wealth management business may slow given aless favorable equities market. The Hang Seng Index has fallen 17% since thebeginning of the year.

"We'll have to wait and see," he said.

Or said Hang Seng is looking for opportunities in China to invest in theinsurance business, but he didn't elaborate.

The bank also plans to expand its branch network in the mainland, and isworking to increase the number of outlets in the key cities of Shanghai, Beijing, Guangzhou and Shenzhen.

Hang Seng Bank has over 160 outlets in Hong Kong and 25 outlets in China,under its mainland China-incorporated unit. In late August, the bank obtainedapproval to offer full yuan deposit services to local residents.

It also owns a 12.78% stake in Fujian province-based Industrial Bank Co. (601166.SH) and recently said it will acquire a 20% stake in Shandong province-based Yantai City Commercial Bank for CNY800 million. The bank expects the dealto be completed in mid-2008, Or said.

-By Chester Yung, Dow Jones Newswires; 852-2802-7002; chester.yung@dowjones.com