[ET Net News Agency, 14 June 2018] Moody's Investors Service said that Hong Kong's
banks will likely show wider margins and better profitability as interest rates rise with
the tightening in liquidity and as the gap between US and Hong Kong rates narrows.
"Although the current tightening in liquidity will increase the challenge for Hong
Kong's banks in managing their liquidity conditions, it will also lead to wider margins
and better profitability for the sector, particularly the large lenders," said Sonny Hsu,
a Moody's Vice President and Senior Credit Officer.
"Large Hong Kong banks have a bigger share of demand and savings deposits in their
deposit mixes than their midsize peers, and while the yield on their loans and investments
rise along with overall market interest rates, their cost of funding should remain low,
leading to a widening in their net interest margins," said Hsu.
Moody's conclusions are contained in its just-released report, "Banks - Hong Kong: Large
lenders stand to gain most from rising rates as liquidity tightens".
With funds flowing out of Hong Kong dollar, interest rates in the local currency will
move more closely in line with rising US dollar rates, as the Federal Reserve tightens
monetary policy.
Accordingly, Moody's expects interest rates in Hong Kong to climb throughout 2018,
leading to tighter liquidity, but we also expect the pace of increases to be gradual.
Even with the rise, interest rates should remain accommodative in Hong Kong in the
remainder of 2018, and are unlikely to create undue interest repayment burdens on
borrowers.
Higher rates should also cool housing demand in Hong Kong, where property prices rose at
a double-digit pace in 2017. Rising rates should make other investments, such as
government and corporate bonds, more attractive, relative to properties, especially given
the steady drop in rental yields in recent years.
Moody's believes that a slowdown in housing price appreciation should lower the
likelihood of a future severe price drop, which is positive for Hong Kong's banks.
They are also unlikely to incur material losses on their direct mortgage exposures even
in the event of a 20% - 30% drop in housing prices, as they have underwritten residential
mortgages with conservative loan-to-value ratios.
That said, a material correction in property prices can nevertheless contribute to lower
household spending and weaker economic growth, leading to weaker asset quality for the
banks' business and other consumer lending.
Generally, we expect Hong Kong's banks to retain sound liquidity profiles in both the
Hong Kong dollar and foreign currencies even if fund outflows persist. (KL)