Banks under pressure from the Sars outbreak should avoid mistakes arising from over-aggressive tactics, the banking regulator has warned. Hong Kong Monetary Authority deputy chief executive David Carse said yesterday banks were set to post lower than expected profits this year as the health crisis increased credit card bad debt, reduced loan demand and lowered sales of fee income products. 'Banks should accept that profits for 2003 may not reach budgeted targets as a result of the outbreak; and they should not strain too much to make up the difference,' Mr Carse said in an address to the Hong Kong Foreign Bank Representatives Association. 'When profitability comes under pressure, it is important to avoid the mistakes that might arise from over-aggressive business tactics.' Mr Carse said banks should accept that bad debt levels were set to rise as the economy was hit hard by the virus. 'Asset quality may suffer if businesses go bust and more individuals become unemployed . . . credit cards and mortgage loans are potential areas of vulnerability,' he said. 'The most reasonable assumption is that bad debt provisions and charge-offs will increase, though we do not yet know to what extent.' Banks would also be hit by the 7 per cent first quarter fall in property prices because of the effect on the negative equity situation, Mr Carse added. 'The negative equity problem will have got worse as the latest figures to be published shortly will show. This poses some threat to the profitability of banks,' he said. Sars had hit sales of wealth management products because customers were avoiding visiting branches, while mortgage lending had dropped as fewer flats were sold. Credit card business had also suffered as people cut spending on dining out, entertainment and travel. Mr Carse said the outbreak had offset the good results recorded by most banks in the first three months, with most improving their profits from the same quarter last year. Another good sign early in the year was that the average credit card charge-off ratio had fallen to 11.3 per cent in the first two months from 13.25 per cent last year. Meanwhile Hang Seng Bank deputy general manager William Leung Wing-cheung yesterday said average spending through credit cards by its customers fell by 22 per cent during the first week of April compared with a 'normal' week as a result of the Sars outbreak. However, this had improved to slightly more than 10 per cent during the month. He also predicted that credit card charge-off ratios would increase this year due to shrinking loan receivables caused by banks tightening their card policies. While some banks have reported their charge-offs have fallen this year, Hang Seng Bank's is unchanged at 8.8 per cent. 'In terms of the general industry, the credit card business has a structural problem,' Mr Leung said. 'We have found that after a year of write-offs, receivables across the industry are shrinking because in the past people would take out quite a number of credit cards and borrow to repay other credit card debts.' Now that banks had cancelled some cards and written off bad debts, loan receivables and cash advances had both decreased, he said.