【Hang Seng Bank 2025 Annual Report】Hong Kong Commercial Real Estate Impaired Loans Soar 36% to HK$27 Billion; Hang Seng's Non-Performing Loans Deteriorate to 7.04%

H shares HSBC (00005) In January this year, Hang Seng Bank, which was privatized recently, uploaded its 2025 annual report. It reports that commercial real estate loans in Hong Kong, not related to Mainland China’s business real estate industry (hereinafter referred to as Hong Kong CRE loans), as of December 31, 2025, amounted to HKD 26.98 billion, an increase of 36% year-on-year, and are classified as “credit impaired.”

The expected credit loss (ECL) provision for Hong Kong CRE is HKD 5.09 billion, up 2.1 times from the previous year. As of the end of last year, Hang Seng Hong Kong CRE loans totaled HKD 116.46 billion, a decrease of 11% year-on-year.

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Hang Seng Bank stated that the increase in the expected credit loss provision for the Hong Kong commercial real estate loan portfolio last year was due to negative migration in credit quality and pressure on collateral values. The negative migration mainly occurred in the mortgage loan portfolio (accounting for 62% of the total portfolio as of December 31, 2024, compared to 61% as of December 31, 2024), but the migration rate slowed in the fourth quarter.

The risk exposure for “substandard” and “credit impaired” loans increased to HKD 40.6 billion (as of December 31, 2024: HKD 36.6 billion), of which 96% (as of December 31, 2024: 94%) are collateralized.

Hang Seng: Medium-sized and non-investment grade CRE companies in Hong Kong may face continued valuation pressure and liquidity constraints in the short term

Hang Seng also mentioned that the market environment remains challenging, with valuation pressures and liquidity constraints likely to persist in the short term, especially for medium-sized and non-investment grade companies. The full recovery of the retail property market will take some time, as landlords need to adapt to changing consumer patterns. The office market faces oversupply, which is expected to continue exerting pressure on rents and capital values this year. The bank continues to closely monitor and manage risks in its loan portfolio, including loan reviews and stress testing, and has strengthened oversight and management of borrowers facing repayment difficulties (including those with repayment challenges and high loan-to-value ratios).

Hong Kong CRE provisions increase, dragging down Hang Seng’s 2025 performance

Last year, Hang Seng’s Hong Kong CRE impaired loans increased, along with related ECL provisions, which also affected the bank’s overall performance. The annual report states that the expected credit loss (ECL) for Hang Seng Bank is projected to increase by 69% in 2025, reaching HKD 8.05 billion, mainly related to Hong Kong commercial real estate. The report notes that the overall increase in ECL is primarily due to higher provisions for new default risks, credit migration of assets, oversupply in non-residential properties putting downward pressure on rents and capital values, and model updates used for calculating expected credit losses.

As of the end of last year, Hang Seng Bank’s total impaired loan ratio was 7.04%, up 0.92 percentage points year-on-year, and up 0.35 percentage points from the end of the first half.

The annual report shows that last year, Hang Seng’s attributable profit was HKD 15.76 billion, down 14% year-on-year, mainly due to a significant increase in ECL changes and other credit loss provisions to HKD 8.05 billion. Operating income before ECL changes and other credit loss provisions increased by about 2% year-on-year.

Last year, Hang Seng’s net interest income fell 6% to HKD 28.84 billion, mainly due to the impact of declining market interest rates. The net interest margin narrowed by 21 basis points to 1.99%, mainly due to a 15 basis point decline in yield on interest-free funds. Net fee income increased by 19% to HKD 6.33 billion.

Hang Seng indicated that last year, the bank’s total customer loans decreased by 3% to HKD 8.07 trillion, mainly due to weak loan demand and regular loan repayments. As of the end of last year, total impaired loans stood at HKD 57 billion, up 12% from HKD 51 billion at the end of 2024, mainly reflecting downgrades of some impaired corporate loans and loan write-offs.