Hong Kong banks could see their profits tumble as much as 45 per cent year-on-year if the sharp decline in business activity and consumer spending triggered by the Sars outbreak persists until the end of the year, Standard & Poor's warned yesterday.
The credit ratings of banks in Hong Kong are not expected to be downgraded due to the health crisis but profit levels will be hit if the current pattern of business and consumer activity drags on even as the number of new Sars cases tapers off, said Terry Chan, S&P's director of financial services ratings.
'We focused on consumer and business behaviour caused by the Sars outbreak,' Mr Chan said. 'The number of cases in Hong Kong declined to single digit levels but consumption levels are still much lower.
'It's still early days. We're still coming to grips with the quantum of potential losses for the sector. The first quarter wasn't too bad. The worry is April and the lag effect that will flow into other quarters.'
If the Sars-induced downturn drags on for nine months, profitability at Hong Kong banks will decline 35 to 45 per cent from last year and the economy will contract 1 to 2 per cent, Mr Chan said. If it lasts six months, profits will fall 20 to 25 per cent, as the economy shrinks 1 per cent or produces flat growth.
If it lasts just three months to the end of June, banks' profits will decline five to 10 per cent and the economy will grow just 1 to 2 per cent, Mr Chan said.
The worst case scenario of a 45 per cent profit drop would be due mainly to a sharp rise in bad debt charges, he said.
