A small group of specialist bankers in Hong Kong is taking aggressive action to cut a mountain of soured debt, signaling a pivotal shift in how the city handles corporate distress.
Hong Kong lenders are expanding specialized teams to clean up an unprecedented HK$200 billion ($25.6 billion) pile of soured loans, driven largely by defaults in the city's troubled commercial real estate market. The surge in bad debt has pushed the city’s distressed loan ratio to 2.01% as of year-end, the highest level since 2004, forcing banks to abandon patience in favor of forced asset sales and liquidations.
"There’s a clear shift from waiting to acting," Derek Lai, a senior partner on the global restructuring leadership team at consulting firm EY-Parthenon, said. "Decisions are still case by case, but the tilt is now towards taking the hit and moving on, especially for commercial property loans."
The move is evidenced by at least half a dozen banks, including Bank of East Asia Ltd. and the Hong Kong branch of United Overseas Bank Ltd., which have nearly doubled their special asset recovery headcount since the beginning of 2024. Bank of China (Hong Kong) Ltd. and Hang Seng Bank Ltd. have also expanded their teams. These bankers are actively appointing receivers to seize assets, with BOC Hong Kong moving to sell the 25-floor HK NEO tower to recoup a HK$5.5 billion loan, while BEA has appointed receivers to sell the One Bedford Place office tower.
This aggressive stance marks a departure from the city’s long-standing “Hong Kong Approach to Corporate Difficulties,” a method favoring support for firms in stress that was codified after the Asian financial crisis. With a mountain of bad debt now constraining their balance sheets, banks are seizing a window of opportunity to free up capital for new lending as other parts of the economy show signs of recovery.
A Departure From The 'Hong Kong Approach'
The quiet expansion of these so-called special asset, workout, or recovery teams marks a significant tactical change for Hong Kong's finance sector. For years, the city prided itself on a relationship-based approach to working through corporate debt problems. However, the sheer scale of the current problem, rooted in the deep slump of the commercial property market, has made that strategy untenable.
The work is becoming an "absolutely critical function," said Jason Bedford, a visiting senior research fellow at the East Asian Institute. These teams are tasked with the complex and labor-intensive process of recovery and loss containment. The urgency reflects a desire among lenders to provision for losses and clean up their loan books to build firepower for new lending, particularly as major infrastructure projects are expected to drive future credit demand.
Commercial Property Pain Lingers
While Hong Kong's residential property market and broader economy are showing signs of a rebound, the commercial real estate segment remains a significant drag. The vacancy rate in commercial buildings stood near an all-time high at 16.8% at the end of March, according to data from CBRE Group Inc. This glut of empty office space, worsened by distressed fire sales, is the primary driver of the banks' non-performing loans.
The divergence between the struggling commercial sector and the recovering broader economy is forcing the banks' hands. By taking decisive action now, lenders aim to cauterize the wounds from their commercial loan portfolios, even if it means realizing losses in the short term. This allows them to reallocate capital towards more promising sectors and avoid a prolonged period of stagnation tied to underperforming real estate assets.
This article is for informational purposes only and does not constitute investment advice.
