The HKMA said that domestic lending in local currency was marginally up, and that improved operating margins and a substantial decline in bad-debt charges had produced a "notable increase" in profits during the first three months of the new year.

Contributing to the improved profitability were lower funding costs in the interbank market - a situation unlikely to be repeated in the second quarter as funding costs come under pressure from the rising interest-rate cycle in the United States.

Average one-month Hong Kong interbank offered rate (Hibor), fell by 13 basis points to 5.56 per cent during the quarter, following on a 25 basis point fall in the December quarter.

Three-month Hibor was down by 32 basis points to an average of 5.83 per cent.

The best lending rate (BLR) of commercial banks was up 50 basis points to 9 per cent, and the average spread between BLR and one month Hibor widened by 27 basis points to 3.09 per cent during the first quarter.

While total lending declined due to a continued decline in Japanese bank's euroyen lending activities, domestic lending increased in line with the recovery in the economy and banks' increased willingness to lend.

Total loans and advances were down 4 per cent, following on a 1.7 per cent decline in the December quarter, but this extended fall was mainly due to an acceleration in the decline in offshore loans - down 12.7 per cent compared with a contraction of 2.9 per cent in the December quarter.

Domestic lending, by contrast remained virtually unchanged, while Hong Kong dollar loans reversed their downward trend and rose 1.1 per cent during the quarter.

Leading the growth sectors were loans to stockbrokers - up 7.4 per cent in the March quarter from a previous 8.3 per cent growth in the December quarter.

Also showing growth, albeit on a slightly slower note, were credit card receivables - up 4.2 per cent following on a previous quarter increase of 4.7 per cent; while loans made to the manufacturing sector grew 2 per cent from 1.3 per cent in the December quarter.

A trend decline in loans for trade and finance slowed from 6.4 per cent in the December quarter to 1.9 per cent, and loans to the wholesale and retail sector showed a fractional 0.6 per cent contraction, compared with a 5.4 per cent fall in the previous quarter.

Property lending was up 0.8 per cent after falling by 0.1 per cent, but this was mainly due to growth in loans for property development and investment, said the HKMA - up 3.6 per cent and 1.1 per cent respectively.

Mortgage loans made during the quarter were broadly unchanged, after a fall of 0.3 per cent in the previous quarter.

Increases in deposits and a fall in total lending meant the sector's overall aggregate loan to deposit ratio (including foreign banks), was down to 84.6 per cent from 88.5 per cent in the December quarter, though the Hong Kong dollar loan to deposit ratio was up from 91.3 per cent to 93.2 per cent.