HKMA's Choi says banks in for more tough times

The banking environment will remain difficult next year even though financial markets are stabilising, says Choi Yiu-kwan, the outgoing deputy chief executive of the Hong Kong Monetary Authority.

Choi, who will retire at the end of this month, expects retail banks to post pre-tax profit growth this year, saying quarterly profits were improving, compared with a sharp decline in the fourth quarter of last year.

Banking confidence was hit late last year after the collapse of Lehman Brothers Holdings in September.

Banks' loan-loss provisions were not as severe as expected and while asset quality had deteriorated slightly, it was still better than the levels seen in previous crises, Choi said yesterday. 'Some banks will notch up profit growth and others will find their profits under pressure,' he said.

But Choi was still cautious on the banking outlook for next year, saying it was difficult to tell when central banks would withdraw 'quantitative easing strategies', which have increased liquidity to help banks.

He also warned that the withdrawal of quantitative easing in the future would push interest rates higher.

More than HK$640 billion flowed into Hong Kong between October last year and last month, and some has found its way into the stock and property markets.

However, Choi warned that those inflows could reverse, triggering volatility.

A weakening Hong Kong dollar has raised fears that a massive capital outflow will cause asset markets to slump.

Choi said the reason the local currency had weakened was that initial public offering proceeds had been swapped into other currencies and some corporates also had year-end demand for US dollars, putting pressure on the local unit.

However, he urged banks to be vigilant in risk management, monitor the possible impact of a sudden fund outflow or interest rate volatility and maintain adequate levels of capital and liquidity.

He also warned investors to be aware of the uncertain market environment when making investment decisions and said homebuyers should consider the impact on their loan repayments if interest rates rose to normal levels.

Choi said some lenders might need to raise capital to comply with new international rules.

The Basel Committee, an international standard-setting body, is expected to ask banks to raise the quality of their tier-1 capital base, which measures a bank's ability to absorb sudden losses.

'I do not think it will present a major problem to banks in Hong Kong,' he said, adding that the banks maintained high capital adequacy ratios.

Choi joined the HKMA in 1993 after working for the Office of the Commissioner of Banking since 1974. He will be succeeded by Arthur Yuen on January 1.