Fitch IBCA has forecast Hong Kong banks' non-performing loans could reach 5 to 6 per cent of all loans later this year or early next year, but this would not prevent them from being profitable. The ratings agency's stress-test suggested SAR banks would not suffer negative returns on equity until the non-performing loan ratio reached 10 per cent. Fitch said they covered as much as 40 per cent of the bad loans with provisions. Managing director David Marshall said: 'The banking system started with an extremely strong position. The crisis has only made this position [change] from extremely strong to strong, whereas the situation elsewhere in the region is that the crisis has made them go from very weak to bankrupt.' Mr Marshall said the agency did not anticipate a banking crisis to emerge in Hong Kong in the short- to medium-term but the SAR was in a good position to weather a crisis if one occurred. He said the Government would experience few problems rescuing one or two banks if they went bust and that the 'economic cost' of doing so would be manageable. However, in a toughening operating environment and with intensifying competition, Mr Marshall expected smaller banks to be merged into bigger entities to achieve better economies of scale. The agency estimated the 'economic cost' of the Asian crisis to Hong Kong was about 5 to 10 per cent of its annual gross domestic product, making the SAR face a 2 per cent correction in its GDP this year, followed by a 1.6 per cent growth next year. Mr Marshall expected middle-tier companies in Hong Kong to be worst hit by the credit crunch. Large corporates would still be able to borrow, albeit at a higher cost, he said.