Hong Kong banks get negative rating from Moody's for second year

PUBLISHED : Friday, 24 January, 2014, 2:19am
UPDATED : Friday, 24 January, 2014, 2:19am

Hong Kong's banking system has received a "negative" rating from credit agency Moody's for the second year running on the back of concerns about lower profitability and growing credit risks due to its exposure to the mainland where shadow banking is a problem.

Hong Kong is the only place in North Asia, besides Mongolia, that has a negative outlook for its banking system over the next 12 to 18 months, while in south Asia, Singapore, India and Vietnam were also rated "negative", the rating agency said.

Hong Kong's banking system was downgraded to "negative" from "stable" for the first time in June last year.

"The negative outlook for banks in Hong Kong reflects our concerns over persistent negative real interest rates and the banks' growing exposures to mainland China," Stephen Long, Moody's managing director for the Financial Institutions Group in Asia Pacific, said at a press conference yesterday.

"Hong Kong banks have substantially increased their mainland China exposure to 16.5 per cent of consolidated total assets at end-2012, from 9.8 per cent at end-2009," he said.

"While this is an opportunity for banks to expand their lending portfolios, it also entails risks, because future credit performance is likely to be different from past experience."

Four out of six indicators to determine the Hong Kong system's health - operating environment, asset quality, capital and systemic support - are "deteriorating", said Moody's.

Most Asian banks have stable rating outlooks but negative outlooks on stand-alone profiles have increased.

In January last year only 7 per cent of Asian banks were rated as "negative" by financial strength, yet that grew to 10 per cent at the end of the year, the agency said.

As for China, Moody's said the stable outlook is underpinned by its steady expansion and pursuit of an agenda of orderly reform.

"While we expect Chinese banks to exhibit worsening asset quality and profitability in 2014, their credit metrics should stay within the parameters of their current ratings," said Long.

"In China, continued strong credit growth is pushing up leverage. [But] risk [is] mitigated by stabilising [gross domestic product] growth and policy resolve for financial reform," he said.