Hong Kong banks are likely to see asset quality pressures from commercial real estate (CRE) exposures moderate in the second half of 2026, according to Fitch Ratings.
In a July report, the rating agency noted that most weak CRE loans have already been classified as impaired over the past two years. However, Fitch cautioned that resolving local CRE problem loans will be a gradual process, as prolonged collateral sales will likely keep credit costs elevated for the most exposed lenders.
The strain on CRE loans first surfaced in 2021 through mainland China-related exposures, before spreading to local portfolios and related assets starting in 2024. Fitch expects a more stable macroeconomic backdrop and a strong IPO market in Hong Kong to help prevent further major deterioration in local CRE portfolios.
Benjamin Man, Financial Services partner at KPMG China, noted in an expert opinion for Asian Banking and Finance that the IPO rebound offers “some relief” to banks while generating new financing opportunities across the broader capital-markets ecosystem. However, he warned that this recovery alone will not trigger a broad improvement in lending.
Man highlighted that while banks have identified key non-performing loans, pockets of weakness will remain an ongoing portfolio management challenge throughout 2026. He added that the most vulnerable institutions are those heavily concentrated in property, construction, and investment company lending—especially where retail and office properties face ongoing vacancy or valuation pressure. Fitch similarly projected that continued value declines in distressed Hong Kong CRE assets will keep credit costs above historical averages for heavily exposed banks.
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