Hong Kong banks will face pressure in the coming year as the downturn in the economy filters to the sector, according to KPMG Peat Marwick partner Robert Kenwick. Presenting the firm's 1995 Hong Kong Banking Survey Report yesterday, he says in the past six months the number of cases recorded of banks appointing advisers to perform debt restructuring for cash-strapped companies and even liquidators to dissolve problem-stricken ones has risen. The credit squeeze in China and the economic downturn in Hong Kong would take some time to take its toll in banks' books in the form of loan loss. 'It would take a long time before banks would give up on the loans,' he said. Medium-sized manufacturers diversifying outside their traditional business might encounter difficulties in repayment. In the past two years, banks had been boosting their general provisioning to 'prepare for nasty surprises around the corner'. As such, the general provisioning level was unlikely to be edged up much further, and to hover about 1 per cent of banks' total advances. Specific provision, however, would suffer as the economic slowdown continued. He said provisioning levels for licensed banks dropped slightly from 0.98 per cent in 1994 to 0.85 per cent of total assets in 1995. The problems arising from economic recession in 1982-83 was only fully reflected in 1985-86. The provisioning level for restricted licence banks (RLB) was up slightly to 0.53 per cent and deposit-taking companies (DTC) to 0.99 per cent. Summing up the banking sector's performance, he said RLBs and DTCs continued to record reduced profits after tax. Their profit dropped 12.9 per cent and 33.7 per cent while profit after tax for licensed banks shot up 11.1 per cent. As most of the time deposits are freely priced, licensed banks no longer use their RLB or DTC subsidiaries to source deposits. Besides, keen competition among licensed banks has encouraged them to tread on turf previously dominated by RLBs and DTCs. He expected the number of DTCs and RLBs to dwindle and their profits to be squeezed. Among the retail licensed banks, he concluded that certain medium-sized banks had performed better than their bigger counterparts, thanks to interest-rate deregulation. 'The deregulation has forced these banks to form asset and liability management committees and think about what deposit rates they want to offer to the market,' he said. 'The medium-sized banks had more room to grow their profit.' In terms of increases in total assets in 1995, First Pacific Bank was top on the list, growing by 34.2 per cent. Stripping out distorting factors, others that achieved significant growth were Wing Lung Bank, Ka Wah Bank and Wing Hang Bank. When measuring retail banks' performance by return on shareholders' funds, Hongkong Bank topped the list with 24.5 per cent, followed by Nanyang Commercial Bank (21.5 per cent), Wing Hang Bank (20.2 per cent) and International Bank of Asia (19.7 per cent).
