Moody's Investors Service has issued a negative outlook for the city's banking sector for next year, citing further volatility in the global economy, aftershocks from the Lehman Brothers minibond saga and poor earnings prospects in a saturated market.
The ratings agency said yesterday that Hong Kong banks had emerged from the financial crisis relatively unscathed, with healthy balance sheets and strong capitalisation. However, it said a difficulty in growing profits could lead banks to take 'unnecessary and unjustified risks', such as unsuitable and aggressive acquisitions of overseas assets.
Banking shares dropped earlier in the day but ended the session slightly up. Dah Sing Banking Group fell 2.79 per cent at one point before finishing 0.17 per cent higher, while Bank of China (Hong Kong) closed flat.
'It's true that growth potential in Hong Kong is low, so the mainland market is really the only way out for a lot of banks,' said analyst Tony Tong of Everbright Securities. 'For example, Bank of East Asia and Wing Hang Bank are both aggressively pursuing this strategy.' But he added Hong Kong banks were unlikely to make unnecessary overseas acquisitions.
Moody's stressed that Hong Kong banks did not suffer from a liquidity problem. Banks had exercised caution in safeguarding their portfolios with a flight to quality to more secure assets. Moreover, the total loan-deposit ratio continued to fall, standing at 45.6 per cent at the end of June.
The report also highlights the Lehman minibond saga as an 'expensive lesson' for the banking sector. It brought massive negative publicity to banks, sending investors to look for other platforms to invest in.