Loan Impairment Charges Analysis for Business Forecasting in Banking Industry: Hong Kong Case Study

The banking industry in Hong Kong is highly competitive, with both local business banks and international giants in the market. Hong Kong’s Banks’ bargaining power of pricing, as reflected in the lending rates setting, is rather limited in Hong Kong. This suggests that banks’ profitability becomes crucially dependent on how well they manage their loan losses and provisioning. The study investigates among four selected banks in Hong Kong, the ways generally adopted by banks in managing their loan loss provisioning over the observable business cycle, the determinative economic factors in banks’ loan impairment charges (LIC) and other credit risk provision (OCRP), as well as the driving sectors in banks’ loan books growth. The selected banks are significant representatives of the Hong Kong banking industry, with their business altogether account for around 70% of the total assets of Hong Kong banking sector as at December 2010.