Moody's warns Hong Kong banks over increased loans exposure to mainland
Increased exposure to mainland borrowers poses risks to banks, says ratings agency, amid concerns over companies' ability to repay loans
Ratings agency Moody's restated its negative outlook on the city's banking system yesterday in a new report highlighting the risks to lenders over the next 12 to 18 months from rapidly expanding exposure to mainland borrowers.
"Such expansion poses credit challenges as it increases the banks' exposures to China's economic and financial vulnerabilities, and pressures some of the banks' liquidity profiles and capitalisation levels," Moody's experts wrote in a 23-page analysis.
Moody's first issued its health warning on Hong Kong banks in June 2013. Since then the local economy has slowed and mainland loans have swollen while credit conditions have worsened.
Hong Kong's exposure to the mainland grew by 29 per cent in 2013, accounting for 20 per cent of total banking assets, or HK$2.3 trillion, by the end of last year, according to the report.
In a report earlier this month, Fitch Ratings said exposure to the mainland was equivalent to 34 per cent of Hong Kong banks' system-wide assets.
Standard Chartered added to the downbeat banking outlook as it issued a warning to investors that first-half profit would be around 20 per cent below that of the same period last year.
The statement, which came after the Hong Kong stock market closed, sent the bank's London-listed shares tumbling more than 5 per cent to their lowest level since August 2012.
The profit warning also dragged HSBC stock down by around 1 per cent as investors reassessed the risks in the key Asian markets in which both banks earn most of their profits.
The Moody's analysis reflects those concerns, despite signs of stabilisation in Hong Kong property prices and broadly benign credit market conditions.
At the heart of the concern over rapid growth in exposure is mainland firms' ability to repay that debt as the economy there slows and the central government attempts to reform its inefficient state sector.
The key to keeping loan books healthy will be whether a raft of recent efforts to stabilise economic growth on the mainland work, according to Liao Qun, senior vice-president of strategy and planning at Citic Bank.
"If China can maintain above 7 per cent growth this year, then I think the risk is low," Liao told the South China Morning Post. "That means there will be no massive defaults for mainland companies this year." The mainland government has a growth target of 7.5 per cent this year.
The Hong Kong Monetary Authority said the growth in exposure was a "natural consequence" of China's economic development.
"The results of our supervisory works suggest that the risks of mainland-related loans are prudently managed by banks," an authority spokeswoman said.