Hong Kong banks are expected to maintain strong returns in 2026, with net interest margins facing downward pressure

Hong Kong banking sector has recently performed well, driven by an unexpectedly strong increase in asset returns. According to industry analysis, this rally reflects an improvement in banks’ tangible net asset return on equity (ROTE), bringing substantial investment returns to shareholders.

Looking ahead to next year, market institutions believe that the capital return levels of listed Hong Kong banks are expected to remain relatively high. The projected return on capital is expected to stay within the 10% to 17% range, which is considered a relatively healthy performance in the current low-interest-rate environment.

Interest Rate Cycle Shift Pressures Bank Net Income

The latest Federal Reserve dot plot signals a clear possibility of 1 to 2 rate cuts in 2026, with further cuts to 0 to 1 in 2027. As the rate-cutting cycle progresses, interest rates may eventually fall back to around 3%. This change poses a challenge to the operating environment of Hong Kong banks.

Under the expectation of rate cuts, the core profitability indicator for Hong Kong banks—net interest margin—may continue to weaken. However, as long as the magnitude of rate cuts aligns with market expectations, the decline in banks’ net interest income should remain in the low single digits, avoiding significant volatility. Overall, the return capacity of Hong Kong banks remains supported.