'Modest default risk' in property price slump
The city's banks face moderate default risks even if property prices drop significantly, according to ratings agency Fitch.
The recent spate of rises in mortgage lending rates would improve banks' profit margins but they also reflected higher risks for the home-loan business, said Fitch's head of Hong Kong financial institutions Sabine Bauer. But the ability of home-buyers to repay would be stable even if property prices dropped, given the low interest rates.
The Monetary Authority has stipulated a minimum 15 per cent risk weighting for mortgage loans for large banks, forcing lenders to hold more capital to cover default risks.
HSBC, Bank of China (Hong Kong), Standard Chartered, Hang Seng Bank and Bank of East Asia have all raised their mortgage lending rates by 0.25 percentage point as a result.
Fitch said it was concerned about the mainland exposure of local banks owing to their expansion across the border and a rise in the number of mainland-based borrowers.
The firm expected banks' gross mainland exposures, which are mainly in US and Hong Kong dollars, to rebound modestly this year, in line with greater trade volumes and direct investment on the back of improved economic outlook on the mainland.
Gross mainland exposure contracted to 25.1 per cent of banking assets at the end of September, compared with 26.3 per cent at the end of June.
For mainland banks, Fitch said, refinancing and liquidity risks had risen due to funding sourced from the interbank market and aggressive issuance of wealth management products as substitutes for time deposits.
Mid-tier banks faced greater challenges, said Charlene Chu, the head of China financial institutions at Fitch.
Funding is tighter for mid-tier banks, such as China Citic Bank, China Merchants Bank and China Minsheng Bank, compared with their large, state-owned peers, making it more difficult for them to meet payout obligations for wealth management products.