[ET Net News Agency, 12 October 2018] Hong Kong banks' earnings are likely to be
supported over the medium term by strong volume growth, particularly in lending to
mainland China, and higher interest rates, says Fitch Ratings.
However, rising competition in the local market could largely offset these positive
trends, particularly for smaller banks, while there is a risk that banks shift into
higher-yielding assets to support their margins.
Rising US interest rates should soon lead to some recovery in Hong Kong banks' domestic
interest earnings, which have been very low during the period of ultra-loose global
monetary policy, the credit rating agency said.
Interest margins are also likely to increase across the system as a whole, given that
deposits generally reprice more slowly than lending rates. That said, ample liquidity and
competition could continue to make it difficult for some banks to pass on rising funding
costs to customers. Smaller banks are more prone to margin compression due to their weaker
deposit franchises and subordinated debt issuances to support capitalisation.
Greater competition is due primarily to the rapid growth of mainland Chinese-owned banks
in Hong Kong. Their branches and subsidiaries accounted for 38% of system assets and
deposits at end-2017, up from 32% five years earlier.
Non-bank financial institutions (NBFIs), such as financial leasing companies, securities
firms, finance companies and money lenders, are also increasingly challenging banks. These
entities, some of which are Chinese-owned, are not supervised by the HKMA, even though
they compete directly with banks, including for consumer loans. Technology firms are also
set to play a larger role in the market after the Hong Kong Monetary Authority recently
allowed non-bank entities to provide payment services and apply for virtual bank licences.
Fitch expects competition to be more intense in the mortgage market, where banks
financed less than half of property purchases in 1H 2018. Lending has instead come from
companies related to property developers and NBFIs, while a portion of buyers paid in
cash. Room for even the larger banks to raise mortgage rates will be limited in this
crowded market, while small to medium-sized banks will find it very challenging. Banks'
revenue contribution from mortgages is low, but they compete for mortgage shares to
facilitate wider relationships with customers. (KL)