Hong Kong banks have withstood the credit crisis well compared with their European and American counterparts.
But a survey conducted by an accounting firm shows there are some concerns that the local banking sector faces a knock-on effect from the European debt crisis.
KPMG's survey shows that despite a strong performance last year, Hong Kong's banking sector faces liquidity and credit quality concerns, and an impact from Europe.
The survey shows that last year was characterised by sustained loan growth, rising asset prices, low levels of bad debts and significant increases in the sale of investment products.
However, while the first half of this year saw a continuation of these favourable conditions, continuing low interest rates have placed further pressure on net interest margins, making it difficult for banks to grow revenue to offset rising wages and other costs. Banks will increasingly focus on operational efficiencies, off shoring and managing costs, the report says.
In addition, the report notes that Hong Kong dollar liquidity is increasingly becoming a more pressing concern for banks. The growth in local currency deposits has lagged behind Hong Kong dollar loans, as customers have favoured the appreciating yuan. In turn, the tightening of liquidity has helped to bring some pricing power back to the banks and added to the upward pressure on deposit rates as lenders compete for funds.