The Hong Kong Monetary Authority has warned the operating environment for banks remains difficult this year and predicts some lenders could have slipped into the red last year.
Choi Yiu-kwan, a deputy chief executive of the de facto central bank, expects banks to see a decline in last year's profit and a 'very, very small number' could make a loss.
'The operating environment in 2009 is still difficult,' he said.
Mr Choi believed fee income could continue to fall because of the unfavourable investment environment.
He said whether prospects for the financial industry could improve depended on how effective rescue packages in the United States and Britain were and the general economic situation.
Hong Kong lenders are expected to post lower earnings for last year due to a surge in impairment charges for loans and securities investments. Net interest margin has narrowed, fee income has declined and costs have increased.
Mr Choi said he expected the asset quality of banks to deteriorate this year but not to the levels seen during the Asian financial crisis.
He said credit cards' charge-off ratio, which measures write-offs, stood at 2.72 per cent last year and could climb further. But it is unlikely to scale the heights of 14.5 per cent seen in 2002.
Mr Choi said Hong Kong lenders' financial strength remained healthy, with an average capital adequacy ratio of 13.8 per cent at the end of September.
'We hope financial institutions are well prepared and can increase capital if possible,' he said.
The cost-income ratio of the banking sector rose to 45.2 per cent last year from 40.5 per cent, indicating banks are facing higher operating costs but declining income.
Mr Choi urged lenders to control costs through means other than cutting staff.
Meanwhile, the HKMA said it would continue beefing up its supervisory resources in major risk areas. It has established a new division to enhance the surveillance of banks' financial markets and treasury activities.
The cost-income ratio of the banking sector last year increased to: 45.2%