Hong Kong's $25 Billion Debt Woes Spark Bad Bank Talks Amidst Realty Sector Turmoil

Hong Kong lenders are facing a $25 billion debt crisis, prompting discussions about creating a "bad bank" to absorb non-performing loans. The talks are preliminary, and banks would face hurdles before implementing the idea. Fitch Ratings estimates the bad loan buildup may climb to 2.3% by year-end, the biggest jump in Asia Pacific. Industry insiders are concerned about the delay in recognizing impairments and the need for distressed sales.

Hong Kong lenders are grappling with a $25 billion debt crisis, prompting preliminary discussions about creating a "bad bank" to absorb non-performing loans. The talks, involving some of the city's largest banks, are still in their early stages and face significant hurdles before implementation [1].

Fitch Ratings estimates that the bad loan buildup may climb to 2.3% by year-end, the largest increase in Asia Pacific. This surge in non-performing loans (NPLs) is driven by the city's real estate sector, where office vacancies are surging to record levels, and developers like New World Development Co. have faced financial turmoil [1].

Industry insiders, such as Jason Bedford, a former UBS Group AG analyst, are concerned about the delay in recognizing impairments and the need for distressed sales. Bedford predicts that Hong Kong banks are going through a textbook credit cycle, with NPLs rising, loan growth stalling, and banks increasing risk scoring standards [1].

The Hong Kong Monetary Authority (HKMA) has stated that the banking sector's overall asset quality is manageable and provisions remain sufficient, despite the rise in bad loans. The total capital ratio of locally-incorporated banks stood at 24.2% at the end of March 2025, while the average liquidity coverage ratio of major banks was 182.5%, far above international minimum requirements [1].

While the valuation of commercial real estate in Hong Kong has likely fallen more than 50% in recent years, few transactions have occurred, masking the true extent of the problem. Cusson Leung, chief investment officer at KGI Asia Ltd., noted that banks are trying to maintain the mark-to-market value of their property to avoid huge impairment losses [1].

In the first half of 2025, HK$2.9 billion, or 20%, of a total of HK$14.8 billion in transactions of mortgage sales and assets were sold at a capital loss. The HKMA monitors that banks have "appropriate and timely loan classification and provisioning at all times" and subjects them to independent validation by external auditors [1].

The drop in the Hong Kong interbank offered rate (Hibor) from 4.6% to 1.1% has also put pressure on lenders' net interest margins, but fee income from wealth management remains strong [1].

Chinese AI startup Zhipu is considering shifting its planned initial public offering (IPO) to Hong Kong instead of mainland China, adding to the city's dealmaking boom. Zhipu, backed by Alibaba Group Holding Ltd. and Tencent Holdings Ltd., is working with financial advisers on a potential IPO that could raise about $300 million [2].

Meanwhile, the Fitch-dv01 HELOC Benchmark, launched in July 2025, provides a comprehensive view into the performance of the home equity line of credit (HELOC) market, covering 80% of rated HELOC securitization volume [3].

References:
[1] https://www.bloomberg.com/news/articles/2025-07-16/hong-kong-s-25-billion-debt-woe-sparks-talks-on-bad-bank
[2] https://www.bloomberg.com/news/articles/2025-07-11/openai-challenger-zhipu-said-to-weigh-shifting-ipo-to-hong-kong
[3] https://www.prnewswire.com/news-releases/dv01-and-fitch-ratings-launch-heloc-dataset-to-enhance-second-lien-benchmarking-302504801.html