Several Hong Kong banks will unveil slower balance-sheet growth and lower earnings in end of year reports this month. That warning came yesterday from David Carse, deputy chief executive of the Hong Kong Monetary Authority (HKMA), who said the banking sector had endured a very challenging year. Speaking at the HKMA's annual review of the sector, Mr Carse had few words of comfort on prospects for the year ahead, which he said was likely to show little improvement in operating conditions 'with the scope for variation all on the downside'. Underlining the bleak conditions was the latest data on lending, released yesterday by the HKMA. It showed deposits and loans both shrank in December - with deposit levels in the industry down 1.1 per cent and total loans and advances down 1.2 per cent. On a quarterly comparison, home mortgage loans were up 0.5 per cent in the final quarter over the third quarter; while loans for building, construction, property development and investment increased by 0.9 per cent. However, loans for trade financing shrank by 8.7 per cent in the third quarter, while loans for wholesale and retail trade dipped 7 per cent. Mr Carse said continued poor loan demand, combined with a squeeze on margins and cost-income ratios as bank operating costs rose faster than revenues, meant balance-sheet growth was declining and some banks also would report lower profits. 'But, as usual, performance will be patchy,' he said. The results also would show more credit card loans going bad as bankruptcies rose and banks were forced to write off credit card debt and mortgage loans. 'We took an average of the October and November data on charge-offs and delinquency ratios to calculate a final-quarter figure, and this suggests a rise in charge-offs in credit cards to 6.4 per cent - which is well above the pre-crisis levels,' Mr Carse said. This increase was partly a 'once and for all' result of banks changing their charge-off policy during the year. He said: 'Some banks are now charging off bad debt earlier than before. Previously, they waited for a bankruptcy order to be made against a customer, but now they are beginning to charge off the loan as soon as a petition is granted.' Mr Carse said the growing practice by banks of selling guaranteed funds had led to some diversion of deposits. Forecasts canvassed from banks under the HKMA's regulatory control suggested that, in the absence of major shocks, there would be some growth in lending, albeit modest, he said. Bankers suggested they did not expect rapid growth in non-performing commercial loans, although they had raised concerns about growing consumer defaults. 'Finally, provisions may rise, but an upsurge is not expected and generally there may be some profit growth,' Mr Carse said. But he warned that the outlook remained difficult to predict, suggesting any variation would be on the downside.