High Interest Rates Thwart Leading Hong Kong Broadband Company Earnings

Hong Kong Broadband Network (HKBN Ltd.), Hong Kong’s second-largest telecommunications provider, issued a profit warning Monday, saying that its earnings had swung into losses as a result of rising interest rates.

HKBD said that it expected to make a HK$1.3 billion ($167 million) loss for the year ending August 2023 vs. a profit of HK$500 million for same period last year. It attributed the big loss to its joint ventures and a rising Hong Kong Interbank Borrowing Rate (HIBOR). HKBD said its borrowing costs are priced at HIBOR plus a fixed margin.

In its 2022 Annual Report, HKBN attributed better financing rates as a helpful offset to its losses incurred by deals with joint venture partners as a result of sluggish local consumption. This year, that situation has reversed as a result of continued hawkishness by the Federal Reserve Bank.

HIBOR has surged by over four times in 2023 as rising US interest rates have increased borrowing costs everywhere. Year-to-date, the HIBOR average is 3.95% vs. just 0.77% for the same time last year, according to HSBC plc HSBC. 

HIBOR is a daily floating interest rate usually calulated on a weekly basis for external lending purposes. As of October 6, HIBOR was near a 16-year high at 4.85%.

Why It Matters: A high HIBOR is seen as a bearish measure for Hong Kong growth. HIBOR is the standard rate at which borrowing costs are priced in Hong Kong.

The rising HIBOR has put huge pressure on all borrowers and mortgage holders in Hong Kong, who have been ratcheting up more debt over the course of the year as property prices have been in freefall.

Earnings of property developers such as China Evergrande Group EGRNF, Country Garden Holdings Company Limited CTRYY and Longfor Holdings Group Limited LGFRY could be affected by the sharp increase in HIBOR during 2023 as the increased mortgage rates put off new home buyers.

Other companies that could be affected by an increased HIBOR are those with high rates of borrowing such as Swire Pacific Ltd. SWRAY and New World Development Co Limited NVDLY, both of which disposed of assets in June to defray higher borrowing costs.