Hang Seng Bank's H1 2025 Profitability Decline: Assessing the Long-Term Sustainability of Its Business Model Amid Credit Margin Pressures

In the first half of 2025, Hang Seng Bank faced a significant profitability decline, driven by a confluence of factors including a collapsing Hong Kong Dollar Interest Settlement Rate (HDISR), a shrinking net interest margin (NIM), and heightened risks in its real estate portfolio. With HDISR plummeting from 3.63% in April 2025 to 0.53% by June, the bank's NIM contracted by 10 basis points in fiscal year 2024, eroding net interest income (NII) by 95% compared to the prior year. This stark shift in interest rate dynamics has raised critical questions about the bank's ability to sustain profitability in a low-margin environment.

Drivers of the Profitability Decline

The primary catalyst for Hang Seng's woes is the HDISR's freefall, which has directly compressed its NIM. The bank's NII in FY24 totaled HK$31 billion—a catastrophic drop from HK$60 billion in FY23—as its homebuyer and enterprise loans, priced at spreads over the benchmark rate, lost value. Compounding this, the bank's Time Deposit (TD) repricing lags, delaying the benefits of lower deposit costs. Analysts project a -4.7% net profit decline for full-year 2025, with some forecasting a steeper 9% drop.

Meanwhile, the bank's real estate exposure remains a ticking time bomb. By the end of 2024, its aggregate loan exposure to property—residential and commercial—reached 36.34%, the highest among Hong Kong's domestic systemically important banks (D-SIBs). With Hong Kong's housing price index hitting a six-year low of 284.2 in March 2025, impaired loan ratios surged to 6.12%, driven by commercial real estate borrowers seeking payment deferrals. While collateral from prime properties offers some protection, broader market fundamentals—affordability constraints and shifting investor sentiment—suggest continued asset devaluation.

Strategic Initiatives to Counteract Declines

Hang Seng's response to these headwinds has centered on three pillars: digital transformation, non-interest income diversification, and risk management.

1. Digital Transformation and Cost Efficiency
   The bank has accelerated its “Future Banking 2.0” initiative, integrating AI-driven services like Smart Teller technology and enhanced digital apps to reduce operational costs. By automating back-office processes and improving customer self-service options, the bank aims to lower its cost-to-income ratio. In 2024, operating expenses rose only 4% to HK$15,193 million, outpacing the 5% drop in net interest income. Restructuring efforts, including a 1% workforce reduction (targeting 8,300 core employees) and streamlining IT and communications departments, are expected to yield $1.8 billion in global savings by 2026.

2. Non-Interest Income Growth
   Hang Seng has successfully offset some NIM pressures by expanding non-interest income, which rose to 26% of net operating income in FY24. Wealth management and insurance services, growing by 17% year-on-year, have become key drivers. The bank's “Wealth Master” platform, recognized at the FinanceAsia Awards 2025, exemplifies its customer-centric approach. By targeting Mainland Chinese clients and deepening cross-border services, Hang Seng is diversifying revenue streams beyond traditional banking.

3. Risk Mitigation and Capital Resilience
   The bank has tightened credit underwriting standards, particularly in commercial real estate, and reduced exposure to mainland China property developers to 2% of its loan book. A CET1 capital ratio of 17.7% as of 2024 provides a buffer for future shocks, while a robust dividend policy (HK$6.80 per share in 2024) signals confidence in its capital management.

Long-Term Sustainability: A Mixed Outlook

While Hang Seng's strategies address immediate challenges, their long-term efficacy remains uncertain. Digital transformation and non-interest income growth are promising, but the bank's reliance on real estate—both for loans and collateral—leaves it vulnerable to prolonged property market weakness. Additionally, its cost-cutting measures, while necessary, risk undermining service quality if overdone.

The bank's ability to navigate 2025 hinges on two factors:
- Interest Rate Normalization: A projected U.S. rate cut trajectory and Hong Kong's eventual rate easing could revive loan growth and stabilize NIM by mid-2025.
- Structural Reforms: Diversifying beyond property and scaling wealth management will require sustained investment in talent and technology, despite current cost pressures.

Investment Implications

For investors, Hang Seng presents a high-conviction opportunity with clear risks. The bank's strong capital position and strategic pivot toward non-interest income justify a cautious bullish stance, particularly if interest rates stabilize. However, the following red flags demand attention:
- Credit Quality: Monitor non-performing loan trends, especially in commercial real estate.
- Cost Efficiency: Ensure restructuring efforts do not erode customer satisfaction or innovation momentum.
- Regulatory Shifts: Hong Kong's monetary policy and property market interventions could alter risk dynamics.

Final Verdict: Hang Seng Bank's proactive cost management and diversification efforts position it to weather near-term margin pressures. However, its long-term sustainability depends on its ability to decouple from property-centric risks and fully capitalize on digital and wealth management growth. Investors should adopt a phased approach, prioritizing valuation metrics (e.g., price-to-book ratio of 1.3x) and hedging against property sector volatility.