The result is that banks are bloated with too much cash on deposit, for which they must pay out interest, and too few of the loans from which they derive profit. The margin between lending rates and interest for deposits has been cut, denying Hong Kong banks what had been one of the largest differentials among developed banking systems and their prime source of revenue. The spread between what banks charge for interest and what they pay depositors has occasionally exceeded 5 percentage points. The comparable figure in Britain is about 2 points, and the spread appears especially high when Hong Kong's extremely low level of debt default is taken into account. However, falling property prices have slashed demand for mortgages, the mainstay of lending for Hong Kong banks, and shaved margins.
Few analysts expect property prices to rise soon.
To remain profitable, banks will be forced to follow the lead of other banking systems and make money more from fees. Hong Kong banks' noninterest income stands at about 22 percent, compared with 40 percent to 45 percent in Australia, Britain and the United States. Raising fee-based revenue requires banks to charge for transactions, sell mutual funds and insurance, organize pension plans and issue credit cards, all of which are wealth management activities ripe for Hong Kong's demographic situation. That age bracket is considered the prime target for wealth management marketing. The switch to concentrating on sales of consumer investment products plays into the hands of the largest banks, which already have a broad consumer base and face no limits on such marketing.