Hong Kong Banking Sector Restructuring and Its Impact on Property Lending: Strategic Asset Optimization and Risk Mitigation in a Post-Pandemic Real Estate Market

The Hong Kong banking sector is navigating a seismic shift in its property lending strategies, driven by a prolonged real estate downturn and the need for strategic asset optimization. At the forefront of this transformation is Hang Seng Bank, which has taken bold steps to address its growing exposure to non-performing loans (NPLs) in commercial real estate. By mid-2025, the bank's credit-impaired commercial real estate loans had surged 85% year-over-year to HK$25 billion, a stark indicator of the sector's fragilityHang Seng Bank Weighs Sale of $1 Billion Property Loan Portfolio^[1]. To mitigate this risk, Hang Seng is reportedly seeking to sell a $1 billion property-backed loan portfolio, a move that could set a precedent for other banks grappling with similar challengesHang Seng Bank Weighs Sale of $1 Billion Property Loan Portfolio^[1].

Strategic Asset Optimization: From Loan Sales to AI Integration

Hang Seng's decision to offload a portion of its property loan portfolio is a calculated effort to reduce its concentration risk. With 36.34% of its total loans tied to real estate—far higher than its peers—the bank has become one of the most vulnerable domestic systemically important banks (D-SIBs) in Hong KongHong Kong lenders face risks from real estate exposure as prices …^[2]. The proposed sale, which includes loans to developers like Emperor International and Tai Hung Fai, reflects a broader industry trend of banks divesting distressed assets to stabilize balance sheetsHang Seng Bank Weighs Sale of $1 Billion Property Loan Portfolio^[1]. This approach aligns with regulatory shifts, such as the Hong Kong Monetary Authority's (HKMA) relaxation of loan-to-value (LTV) ratios and debt servicing ratio (DSR) limits, which aim to stimulate liquidity while maintaining prudential standardsHong Kong Monetary Authority - Countercyclical Macroprudential …^[3].

Beyond loan sales, Hang Seng is leveraging technology to optimize its asset management. The bank has established a Generative AI Centre of Excellence (CoE) to integrate artificial intelligence into internal operations, including an AI-powered code conversion tool that streamlines cloud compatibility for analytical programsHang Seng Bank champions responsible AI …^[4]. These innovations not only enhance operational efficiency but also position the bank to better assess and manage credit risks in real time. As stated by Hang Seng's CEO, Diana Cesar, these measures are “sufficient to cover expected losses” amid the property market slumpHang Seng says it is ‘covered’ against bad loans amid property …^[5].

Risk Mitigation: Provisions, Collateral, and Cost-Cutting

To buffer against rising NPLs, Hang Seng has increased provisions for expected credit losses (ECL) to HK$4.9 billion, a move that contributed to a 30% decline in its interim profit in 2025Hang Seng says it is ‘covered’ against bad loans amid property …^[5]. The bank has also ensured that collateral provided by borrowers exceeds 100% of potential bad loan exposure, a prudent strategy to absorb losses in case of defaultsHang Seng says it is ‘covered’ against bad loans amid property …^[5]. Complementing these efforts, the bank has announced significant job cuts—ranging from 10% to 50% in some teams—as part of a broader cost-cutting initiativeHSBC-backed Hang Seng Bank to cut jobs as part of restructuring^[6]. This restructuring aligns with HSBC's global cost-reduction goals and aims to streamline operations in a low-margin environmentHSBC-backed Hang Seng Bank to cut jobs as part of restructuring^[6].

The effectiveness of these measures, however, remains a subject of debate. While Hang Seng's NPL ratio has risen to 6.69% by mid-2025, analysts note that the bank's average LTV of 50% on residential mortgages provides a buffer against further property price declinesHong Kong Monetary Authority - Countercyclical Macroprudential …^[3]. Additionally, the HKMA's macroprudential adjustments—such as suspending interest-rate stress testing for mortgages—have bolstered liquidity without compromising risk managementHong Kong Monetary Authority - Countercyclical Macroprudential …^[3].

Broader Industry Trends and Regulatory Support

The Hong Kong banking sector's resilience is underpinned by regulatory support and macroeconomic adjustments. The HKMA's 2024-2025 policy changes, including a 70% LTV cap for residential properties and a 50% DSR limit, have aimed to stabilize the market while preventing excessive leverageHong Kong Monetary Authority - Countercyclical Macroprudential …^[3]. These measures, combined with the removal of a 10-percentage-point reduction in LTV/DSR for existing mortgage holders, signal a shift toward balancing affordability with prudenceHong Kong Monetary Authority - Countercyclical Macroprudential …^[3].

Despite these efforts, commercial real estate remains a critical risk. Hang Seng's 15% credit-impaired CRE portfolio—up from 0.78% in 2023—highlights the sector's fragilityHong Kong lenders face risks from real estate exposure as prices …^[2]. Analysts warn that smaller and midsize banks, with higher exposure to leveraged developers, face greater vulnerabilitiesHong Kong lenders face risks from real estate exposure as prices …^[2]. However, the broader sector's stronger capital positions compared to the 1997–1998 crisis reduce the likelihood of a systemic collapseHong Kong Monetary Authority - Countercyclical Macroprudential …^[3].

Expert Analysis and Outlook

The effectiveness of Hang Seng's restructuring hinges on its ability to balance short-term risk mitigation with long-term strategic growth. While the loan portfolio sale addresses immediate liquidity concerns, the bank's reliance on AI and digital transformation will determine its adaptability in a rapidly evolving market. As noted by industry experts, the integration of generative AI into operations—such as Hang Seng's code conversion tool—has already improved efficiency and reduced human errorHang Seng Bank champions responsible AI …^[4].

Looking ahead, the success of these initiatives will depend on external factors, including the pace of property market recovery and regulatory interventions. The proposed HK$20 billion public fund to stabilize distressed properties could provide a lifeline for developers and lenders alikeHang Seng Bank Weighs Sale of $1 Billion Property Loan Portfolio^[1]. However, without sustained demand-side reforms, the sector's challenges may persist.

Conclusion

Hang Seng Bank's restructuring efforts—spanning loan sales, AI integration, and cost-cutting—underscore the Hong Kong banking sector's proactive approach to navigating a post-pandemic real estate downturn. While the road ahead remains uncertain, the bank's strategic asset optimization and regulatory support position it to weather the storm. For investors, the key takeaway is clear: resilience in this sector will be defined not by short-term fixes but by the ability to innovate and adapt in the face of prolonged market volatility.