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Cao Li

The value of collateral assets used by banks for commercial property loans is expected to continue declining in 2026, according to S&P Global Ratings, as the sector has yet to find a clear bottom.
“More collateral pain is likely this year for Hong Kong banks,” the credit rating agency said in a report published on Thursday, adding that a subset of small banks could face more acute strain.
That assessment comes as Hong Kong’s commercial property market remains on a sustained downturn that started in 2019, as rents continue to fall and vacancy rates soar.
The Bank of East Asia, Hong Kong’s sixth-largest bank by total assets, recently disclosed a HK$723 million (US$92.4 million) valuation loss in its total investment properties in 2025, rising sharply from HK$145 million in 2024.
That illustrated the ongoing pressure on collateral valuations, according to S&P.
The ratings firm tested two stress scenarios: a 30 per cent discount to collateral and a worst-case scenario of a 50 per cent discount. The second scenario was based on recent sales of commercial properties in the secondary market, where owners sold them at around 50 per cent less than what they originally paid.
Banks may be forced to dispose of collateral, especially non-prime assets, at steep discounts that exceed market average valuation, according to the report.
Since the secondary market was not very transparent, it also remained difficult to track such risks in real time, it added.
Under a 50 per cent discount to collateral value, the return on average asset – a key gauge of profitability for banks – could fall to 0.58 per cent from 0.81 per cent in a base case. Their non-performing loan ratio could also grow to 4.3 per cent from 2.9 per cent.

Although the slide in collateral asset valuations appeared to ease in recent months, the market could continue to weaken for a while, according to the S&P report.
Since late 2025, office and retail rents have fallen about 1 per cent and 2 per cent, respectively. That was less severe than the situation in 2024, when office and retail leases were down 5 per cent and 7 per cent, respectively.
According to a report this week from Sam Gourlay, JLL’s head of office leasing advisory on Hong Kong Island, leasing demand in core areas such as Central was returning, primarily driven by financial institutions.
Still, plenty of office space remained available, the report said, adding that retailers faced strong competition, including from cross-border options.
Persistent oversupply and elevated vacancy rates were expected to continue exerting downward pressure on rental levels across Hong Kong’s grade A office market, according to property experts.
“Based on our scenario analysis, the capitalisation of the Hong Kong banking system as a whole would remain resilient even under severe valuation shocks,” said S&P credit analyst Phyllis Liu, adding that the impact was unlikely to materially weaken the sector’s capitalisation and trigger any systemic risk.
“Many banks have cut exposure to commercial real estate in the past five years, thus limiting the impact of losses in this segment,” Liu said. “They also have solid earnings and excess capital to absorb potential losses.”
Such resilience, however, remains uneven. The report said large banks were best positioned to absorb stress.
But a subset of small banks with high exposure to non-prime commercial properties, weaker earnings buffers and aggressive risk appetite were vulnerable to risks such as stressed liquidity conditions or economic downturns, according to S&P.
Some small banks also have larger-than-average capital cushions, which would protect them against weaker earnings capacity, the report said. As a group, they would still be profitable under both stress scenarios, it added.


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The city’s commercial property market remains on a sustained downturn, as rents continue to fall and vacancy rates soar


The city’s commercial property market remains on a sustained downturn, as rents continue to fall and vacancy rates soar.


Hong Kong banks’ collateral asset valuations to continue declining in 2026: S&P

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}The city’s commercial property market remains on a sustained downturn, as rents continue to fall and vacancy rates soar

The city’s commercial property market remains on a sustained downturn, as rents continue to fall and vacancy rates soar