Bad debts seen as key risk for bank earnings

Bank earnings will remain under pressure in the new year as a rising tide of customer loan defaults forces bad-debt provisions higher, analysts say.

'Some [banks] could be in the red for the second half of 2008,' ratings agency Moody's Investors Service said in a newly published sector analysis, warning that weaker core earnings might not be sufficient to offset rising impairment losses.

In recognition of the troubled year ahead, Bank of China (Hong Kong), Bank of East Asia, Fubon Bank (Hong Kong) and Chong Hing Bank have already announced first-ever profit warnings in expectation of further write-downs on exposure to troubled securities or declines in revenue as a result of the global financial turmoil.

But while lenders faced a daunting operating environment in the new year that could see some dipping into the red, losses would not be significant, said Terry Sham, an associate director at Standard & Poor's Ratings Services.

Loan loss provisions were likely to be higher because of the slowdown in economic growth, he said, while the operating environment was unfavourable for fee-based business because of poor sentiment on the stock market and the continued complaints about mis-selling of Lehman Brothers Holdings minibonds, which would make it difficult for banks to sell wealth management products.

'Banks will also continue to be cautious on lending, while fee income will be under pressure,' Mr Sham said.