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Fitch: China Credit Quality, Property are Key Risks for HK Banks in 2016
February 12, 2016 / 10:43 AM / 2 years ago

Fitch: China Credit Quality, Property are Key Risks for HK Banks in 2016

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Hong Kong Banking Sector Update - Investor Presentatihere HONG KONG, February 12 (Fitch) Fitch Ratings says the key issue to watch for Hong Kong banks in 2016 is their China-related credit quality. Other areas of significant risk include property prices, system leverage, and contagion risk from risk-aversion in the property sector and China, both of which could impact liquidity and capital flows, the agency says in its Hong Kong Banking Sector Update for February 2016. Fitch maintains stable sector and rating outlooks for Hong Kong banks notwithstanding their linkages to mainland China. Fitch expects banks' loan impairments to increase, with Chinese borrowers likely to account for a larger share of non-performing loans (NPLs). Retail banks' classified mainland loans rose to 0.77% of mainland loans at the end of September 2015, compared to a total classified loan ratio of 0.65%. We estimate that the China-related NPL ratio will likely rise to about 1.5%-2% by end-2016. The Mainland China exposure (MCE) of Hong Kong banks contracted to USD806bn, or just below 30% of system-wide assets, at end-September 2015, from a peak of USD899bn or 34% of assets a year ago. A large part of MCE is state-related via lending to state-owned entities (SOEs) or claims on mainland banks in the forms of trade finance or interbank placement. Individual banks' business models and market positions continue to drive the quality and composition of their China exposures. Hong Kong's high system leverage, estimated at credit/GDP of 230% at end-2015, has been driven by lending to the corporate sector, in particular China-related lending. Meanwhile, household indebtedness, mainly a result of mortgage borrowing, remains stable at 66%. We believe that direct property risks will remain contained, as banks' loans to the sector were just 12% of assets; also the authorities have the flexibility to soften a price correction by unwinding tight prudential regulations. We consider commercial real estate lending as relatively more risky, as part of it is China-related. In addition, there is significant contagion risk as banks rely on property collateral and valuation gains on their own property holdings to support capital. The presentation slides, entitled 'Hong Kong Banking Sector Update', are available at or by clicking on the link in this media release. Contact: Shaojun Cai Director +852 2263 9917 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Sabine Bauer Senior Director +852 2263 9966 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Related Research 2016 Outlook: Asia-Pacific Banks here Hong Kong Banks' Low-Risk Mortgages here Mainland China Exposure Data File here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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