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27/07/2017 15:01

Moody's sees pressure for Hong Kong banks' credit profiles

[ET Net News Agency, 27 July 2017] Moody's Investors Service said material imbalances
in Hong Kong's (Aa2 stable) economy, including accommodative monetary conditions, rising
corporate and household debt, and inflated property prices are weighing on banks' credit
These factors underpin Moody's negative outlook for the Hong Kong banking system over
the next 12-18 months.
"Despite a pick-up in economic growth since the second half of 2016, modest productivity
increases and the prospect of higher interest rates will weigh on Hong Kong's medium term
economic growth," said Sherry Zhang, a Moody's Analyst.
"Very accommodative monetary conditions have spurred property price increases and rising
private sector leverage, which pose latent risks to the system. Meanwhile, the banks'
growing mainland exposures also pose risks to their credit profiles," added Zhang.
Moody's conclusions were contained in its just-released report "Banking System Outlook
-- Hong Kong: Rising private sector indebtedness and high property prices keep outlook
negative". The outlook expresses Moody's expectation of how bank creditworthiness will
evolve in the system over the next 12-18 months.
The negative outlook is based on Moody's assessment of five drivers: Operating
Environment (deteriorating); Asset Quality and Capital (deteriorating/stable); Funding and
Liquidity (stable); Profitability and Efficiency (stable); and Government Support
Moody's baseline scenario assumes subdued GDP growth of 2.5% in 2017 and 2.0% in 2018.
Credit growth will pick up to a mid-teens percentage rate in 2017, from 6.5% in 2016.
Asset quality indicators should remain stable. Most rated banks' problem loan ratios
remain very low by global standards and should remain stable despite a gradual increase in
interest rates. Nevertheless, medium term risks remain amid high property prices and
rising private sector leverage.
Hong Kong banks have bolstered their capitalization through retained earnings due to
more stringent regulatory requirements. Moody's stress test suggests that rated banks
would maintain sufficient capital even in a stressed scenario.
With a loan-to-deposit ratio of 68% at end-2016, the system is well funded to support
the expected faster credit growth. Liquidity conditions will tighten only marginally as
HKD interest rates rise along with the US monetary policy cycle.
Profitability will also remain stable as rising interest rates support lending income.
Nevertheless, loan impairment charges will rise in 2018 as banks adopt IFRS 9, with banks
assessing their credit impairment charges on an expected basis rather than on an
incurred-loss basis.
Finally, Moody's expects government support in the event of a shock will become less
forthcoming, reflecting Hong Kong's implementation of a revised resolution regime to
minimize the cost of bank resolution and protect public funds. The new statutory framework
vests broad new resolution powers with the bank regulator, including the ability to
bail-in creditors.
Moody's rates 17 banks in Hong Kong that together accounted for 70% of total domestic
loans at end-2016. (KL)

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