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Banking & Finance

Rising private debt, high property prices leave Hong Kong banks with negative Moody’s outlook

Problem loan ratios remain very low by global standards and should remain stable despite a gradual increase in interest rates, report says

PUBLISHED : Thursday, 27 July, 2017, 5:16pm
UPDATED : Thursday, 27 July, 2017, 10:56pm

The outlook for Hong Kong’s banking sector over the next 12-18 months remains negative due to rising private sector indebtedness and high property prices, according to Moody’s Investors Service.

It said most rated banks’ problem loan ratios remain very low by global standards and should remain stable despite a gradual increase in interest rates.

Hong Kong banks have also bolstered their capitalisation through retained earnings due to more stringent regulatory requirements.

Nevertheless, medium term risks remain amid high property prices and rising private sector leverage, which will weigh negatively on banks’ credit profiles.

“Very accommodative monetary conditions have spurred property price increases and rising private sector leverage, which pose latent risks to the system. Meanwhile, the banks’ growing mainland exposures also pose risks to their credit profiles,” says Sherry Zhang, a Moody’s Analyst.

Profitability will also remain stable as rising interest rates support lending income. But loan

impairment charges will rise in 2018 as banks adopt the International Financial Reporting Standard 9 (IFRS), with banks assessing their credit impairment charges on an expected basis rather than on an incurred-loss basis, Moody’s said.

Government support in the event of a shock is also expected to become less forthcoming, reflecting Hong Kong’s implementation of a revised resolution regime to minimise the cost of bank resolution and protect public funds, Moody’s said.

The ratings agency predicted Hong Kong’s GDP growth to accelerate moderately to 2.5 per cent in 2017 from 2.0 per cent in 2016.

Last month, it downgraded the city by one notch to Aa2 after cutting China’s sovereign credit to A1 from Aa3 reflecting an expectation for a further increase in domestic debt in the coming years.

Very accommodative monetary conditions have spurred property price increases and rising private sector leverage, which pose latent risks to the system. Meanwhile, the banks’ growing mainland exposures also pose risks to their credit profiles
Sherry Zhang, Moody’s Analyst

Its negative outlook in the banking system is in contrast with the Hong Kong Monetary Authority’s chief executive Norman Chan Tak-lam, who last month said banks were lending less on mortgages and that their capital base had been strengthened, while putting them in a better position to withstand any downturns in property.

Mortgages now make up 51 per cent of property values on average in Hong Kong, reduced from 64 per cent in 2009 after eight rounds of tightening measures by the government.

Meanwhile, the latest Citibank survey shows that 13 per cent of Hongkongers now think property prices will drop in the next 12 months up from 9 per cent in the second quarter last year, ending a four-quarter consecutive slide. But 57 per cent of interviewees still expected home prices to rise.

According to Lands Department figures, in June there were 9,022 units still pending pre-sale consent.

Residential prices are still expected to maintain their upward trajectory, though growth is likely to be more moderate in the second half, likely at around 5 per cent, compared with the 10.5 per cent growth recorded throughout the first half, according to global real estate firm JLL.

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