HONG KONG (S&P Global Ratings) Sept. 5, 2019--S&P Global Ratings said today that protests in the Hong Kong special administrative region (SAR) will add to negative weight on the city's banks. In our view, the protests have exacerbated the economic drag of U.S.-China trade tensions and slowing growth in China. However, Hong Kong banks can weather the impact.
"Hong Kong banks will likely manage the economic risk given their reasonably prudent underwriting standards, sustainable capital levels, and robust funding and liquidity profiles, backed by effective regulatory monitoring," said S&P Global Ratings credit analyst Shinoy Varghese.
We also expect the Hong Kong government's capacity and willingness to support systemically important banks to remain stable, given the city's sizable fiscal reserves and strong fiscal metrics. In our view, Hong Kong banks' overall creditworthiness will continue to benefit from either Hong Kong government support (depending on their systemic importance) or parent group support.
Private-sector credit growth in Hong Kong will likely remain moderate over the next one to two years, due to lower credit demand in both Hong Kong and China. U.S.-China trade tension and weakening economic activity in Hong Kong and mainland China have reduced trade volumes and dampened loan demand. The protests have further hampered investment activities in the SAR, with the retail and tourism sectors hit hardest. The Hong Kong government recently revised down its real GDP growth forecast for 2019 to 0%-1% from the previous 2%-3%.
We anticipate a mild correction in Hong Kong property prices. A structural housing supply shortage, accommodative monetary policy, and room for policy maneuvering should prevent any steep drops, in our view. Hong Kong's banking sector has withstood property market cycles and severe stresses such as the Asian financial crisis with considerable resilience.
The sector's credit losses will likely remain low and manageable due to reasonably tight underwriting standards. The banking sector's mainland related lending is also subject to close monitoring by the Hong Kong Monetary Authorities (HKMA). Such loans are also usually made to high-quality borrowers, with a significant portion of the obligations backed by collateral or guarantees. Hong Kong banks' asset quality remained stable with an average ratio of nonperforming loans at 0.56% of total loans at end June 2019, compared to 0.55% at end Dec. 2018.
The sector has strengthened its capitalization over the past couple of years through controlled lending, regulatory tier-1 capital issuances, sufficient internal capital generation, and, in some cases, asset disposals. This provides the banks with more buffer to absorb losses.
We expect profitability to compress slightly over the next year due to a modest pick-up in credit costs and narrowing net interest margins amid tight competition and low interest rate environment.
In our view, the funding and liquidity profiles of Hong Kong banks continue to benefit from a stable customer deposit base and limited reliance on short-term wholesale funding. Banks hold a sizable portion of highly liquid assets. The protests have not caused a significant outflow of funds, and deposits in the banking system remain largely stable.
That said, some bank ratings could come under pressure if credit costs were to rise sharply or loan quality deteriorates more severely than the industry average, or capitalization significantly weakens. The Hong Kong government's strong credit fundamentals could erode over time if economic weakness persists and fiscal flexibility is structurally impaired; but this may not necessarily lead to downgrades of Hong Kong banks at current stand-alone credit profiles.
OUR RATED HONG KONG BANKS
- Bank of China (Hong Kong) Ltd. (A+/Stable/A-1)
- DBS Bank (Hong Kong) Ltd. (AA-/Stable/A-1+)
- Fubon Bank (Hong Kong) Ltd. (BBB+/Stable/A-2)
- Hang Seng Bank Limited (AA-/Stable/A-1+)
- Industrial and Commercial Bank of China (Asia) Ltd. (A/Stable/A-1)
- Standard Chartered Bank (Hong Kong) Ltd. (A+/Stable/A-1)
- The Bank of East Asia Limited (A-/Stable/A-2)
- The Hongkong and Shanghai Banking Corp. Ltd. (AA-/Stable/A-1+)
RELATED RESEARCH
- Credit FAQ: Hong Kong Government Ratings Have Buffer To Absorb Impact of Protests, Aug. 30, 2019
- Standard Chartered Bank Affirmed At 'A', SCBHK At 'A+'; Various Positive Actions Taken On Hong Kong Hub Entities, Aug. 07, 2019
- Asia-Pacific Financial Institutions Monitor 3Q 2019: Stable Outlook Likely To Persist Through 2019, Aug. 1, 2019
- Higher Loan Impairments Could Test BEA Ratings, June 17, 2019
- Banking Industry Country Risk Assessment: Hong Kong, April 4, 2019
- Hong Kong, March 28, 2019
- The Future Of Banking: Hong Kong's First Virtual Bank Licenses Will Rejuvenate The Banking Sector, March 29, 2019
- Hong Kong Likely To Stay Supportive Toward Banks With Effective Resolution Regime In Place; No Immediate Rating Impact, March 04, 2019
This report does not constitute a rating action.
S&P Global Ratings, part of S&P Global Inc. (NYSE: SPGI), is the world's leading provider of independent credit risk research. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 26 countries, and more than 150 years' experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information that helps to support the growth of transparent, liquid debt markets worldwide.
| Primary Credit Analyst: | Shinoy Varghese, Hong Kong (852) 2533-3573; shinoy.varghese1@spglobal.com |
| Secondary Contacts: | Fern Wang, CFA, Hong Kong (852) 2533-3536; fern.wang@spglobal.com |
| HongTaik Chung, CFA, Hong Kong (852) 2533 3597; hongtaik.chung@spglobal.com | |
| Media Contact: | Chris Davis, Hong Kong (852) 2533-3511; chris.g.davis@spglobal.com |
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