Fitch flags ‘asset-quality risk’ as Hong Kong banks ramp up lending exposure to China

Hong Kong financial institutions increased their lending exposure to China by 10 per cent in the first quarter, accelerating from 6 per cent growth in 2016, according to Fitch

PUBLISHED : Tuesday, 13 June, 2017, 8:00am
UPDATED : Tuesday, 13 June, 2017, 10:53pm

Hong Kong banks are accelerating their lending exposure to China, driven by a pick-up in trade and improving sentiment towards the mainland economy, analysts from Fitch ratings said in a report on Monday afternoon, which also cautioned of rising asset-quality risk.

The trend is part of broader rise in lending by foreign banks this year, which has seen a rebound from its 2015 trough, as Chinese companies face a funding squeeze on the mainland.

“Hong Kong banks have already reported a 10 per cent quarter-on-quarter rise in mainland China exposure in the first quarter of 2017, compared with growth of just 6 per cent over the whole of 2016,” Fitch said.

Fitch continues to view China-related exposure as the biggest asset-quality risk for Hong Kong’s banks
Fitch report

Total mainland exposure of foreign banks rose by 3.7 per cent in 2016 to US$1.6 trillion, reversing a decline of 14 per cent in 2015, according to Fitch.

Growth in the second half of 2016 slowed to 1.2 per cent from 3.7 per cent in the first half, the report said.

Hong Kong banks account for the largest share of foreign banks’ mainland exposure at 48.9 per cent as of the end December, followed by Singapore at 7 per cent and the UK at 6 per cent. The UK’s share would be 17 per cent if it included the mainland China exposure of UK banks’ Hong Kong subsidiaries, the report said.

Hong Kong banks’ mainland exposure rose to 29.3 per cent of system-wide assets as of the March-ended period, up from 27.3 per cent at the end of December.

“Rising interconnectedness between the Hong Kong and Chinese economies is driving growth now that the fall in forex-speculation-linked lending in 2015 has run its course,” the report said.

“Steady growth in lending to Chinese corporates and other non-bank borrowers - particularly private and non-mainland entities - is likely to continue, in part to support their expansion overseas.

“Fitch continues to view China-related exposure as the biggest asset-quality risk for Hong Kong’s banks, given that China’s economy is highly leveraged and is going through a structural slowdown.”

Fitch noted that banks’ exposure to mainland China has performed relatively well this year, even as data showed that the quality of the loans “continued to slowly deteriorate on average last year”.

More mainland companies are turning to offshore funding channels as they struggle in the tight credit environment created by the government’s deleveraging campaign, which has pushed up onshore lending rates, said Huatai Financial chief financial analyst Chen Shujin.

“However, compared to mainland banks, the growth pace of lending to the mainland economy by foreign banks is much slower. Not to mention the market share of foreign banks is declining in the mainland market in recent years,” she added.

China’s prime money rates edged lower last week after the central bank injected fresh funds into the system through medium-term loans, but analysts remained cautious about the liquidity outlook, given seasonal factors including upcoming tax payments and a possible rate hike by the US Federal Reserve.