Banks operating in Hong Kong have been urged to come up with new strategies to deal with expected cuts in interest rates and monitor their asset quality to prevent a profits squeeze although most lenders have posted better-than-expected interim results.

Global banking titan HSBC Holdings on Wednesday recorded a pre-tax profit of $21.6 billion for the first half of 2024 - a mild decrease of 0.5 percent from a year ago. It approved a second interim dividend of $0.10 per share and plans to buy back shares worth of $3 billion in the next three months.

The banking group’s revenue rose 1 percent, while operating expenses jumped 5 percent during the period. Its net interest margin stood at 1.62 percent – down 8 basis points from the previous year - reflecting a rise in the funding cost of average interest-bearing liabilities.

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“Our investment in the wealth management segment is delivering higher and more diversified revenue. We are confident that we have the right strategy and model to grow revenue, even in a lower interest-rate environment,” HSBC Holdings Chief Executive Officer Noel Quinn said in a company statement.

Hang Seng Bank - HSBC Holdings’ subsidiary - said its pre-tax profit climbed 3 percent to HK$11.3 billion ($1.4 billion), with a second interim dividend of HK$1.2 per share. Amid higher interest rates, the lender’s net interest income rose 2 percent year-on year, and its net interest margin added 20 basis points to 2.29 percent.

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“The Hong Kong banking sector’s performance in 2024 will continue to be affected by uncertainties associated with US monetary policy, the global growth outlook and geopolitical tensions. It will also be closely linked with the health of the Chinese mainland’s economy, which remains challenged by subdued consumer and business confidence and a weak real-estate sector,” Paul McSheaffrey, Hong Kong senior banking partner at KPMG China, and Song Jianing, Hong Kong head of banking and capital markets at KPMG China, said in the KPMG Hong Kong Banking Report 2024.

The report said that as interest rates are due to stabilize or gradually decline, banks in Hong Kong should plan their strategies accordingly on how to deal with a likely NIM squeeze on their profits. Another area that needs to be monitored is asset quality in which the credit quality outlook depends on its exposure to the Chinese mainland’s property sector, as well as small-and-medium enterprises in the special administrative region.

“Banks should continue to monitor developments in the mainland’s real-estate sector and the Hong Kong economy while tracking the performance and asset quality of their loan portfolios,” McSheaffrey and Song said.

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“We expect a steady deceleration in domestic demand, ongoing disinflation and a cooling labor market to allow the US Federal Reserve to begin policy easing in September. The US central bank may use its meeting this week to set the stage for this shift following recent public remarks by policymakers, suggesting that rate cuts are on the horizon,” the UBS Global Wealth Management Chief Investment Office said.

London-headquartered Standard Chartered plc on Tuesday posted a 5-percent year-on-year pre-tax profit of $3.49 billion for the first six months of this year, with an interim dividend increase of 50 percent. The adjusted NIM was 1.85 percent - up 18 basis points from a year ago. The bank also announced the largest round of share buybacks worth of $1.5 billion.

A research report by JPMorgan Chase & Co said Standard Chartered’s better-than-expected performance is due to a reduction in operating expenses and impairment charges. “Compared with HSBC Holdings, Standard Chartered plc may earn higher profits from hedging, so even if interest rates begin to fall, the bank’s net interest margin growth will be more resilient,” the report added.

Share prices of HSBC Holdings and Standard Chartered plc soared 4.6 percent to HK$69.95 and 1.7 percent to HK$78.20, respectively, on Wednesday, while Hang Seng Bank dipped 5.7 percent to HK$95.85.