New Financial Services market report from Business Monitor International: "Hong Kong Commercial Banking Report Q3 2012"

Boston, MA -- (SBWire) -- 07/17/2012 --BMI View: Despite reporting strong profits in the first three quarters of 2011 and being marginally exposed to Europe, our outlook on Hong Kong's banking sector is less than optimistic. We expect banks' loan growth strategy and their exposure to non bank entities in China to weigh on profitability. Despite ongoing uncertainty in the global financial markets, Hong Kong banks have remained relatively resilient, with retail banks' aggregate pre-tax operating profit rising by 22.2% year-on-year through Q111 to Q311. Hong Kong banks are likely to be able to withstand the sovereign crisis in Europe, given that they have little exposure the region. According to a note released by Hong Kong's government, banks' total risk exposure to the countries known as PIIGS (Portugal, Italy, Ireland, Greece and Spain) comprise of less than 1% of total assets, while Hong Kong insurers' exposure amounts to 5% of total investments. Moody's has categorised Hong Kong's banking system as being 'exposed' to the euro crisis. We believe the primary exposure stems from the adverse effects to liquidity risks that many regional economies face from capital outflows as Europe lenders start trimming their balance sheets in Asia. In their capacities as global offshore financial centres, the effects are likely to be more pronounced in the banking systems of Singapore and Hong Kong. That said, we find that Hong Kong's banking system remains well-capitalised, and given the massive improvements in its loan-to-deposit (LTD) ratio from 1997, banks are unlikely to face a liquidity crisis. Profitability To Dip While we see Hong Kong's banking system to be relatively well-buffered against weakness in Europe, we expect profits to take a hit amid macro stress both domestically and in China. We see the challenges to profit confronting Hong Kong banks on two fronts: 1. Challenge To Loan Growth Strategy: Since Hong Kong's economy started to recover from the 2008/09 crisis, banks have had to rely upon sustained loan growth and asset price inflation from the property market boom to compensate for declining interest margins. However, given the state of affairs in the real estate market, this growth strategy is increasingly becoming untenable. Mortgage loan growth collapsed in the latter half of 2011, as economic weakness and the government's cooling measures started to set in. Moreover, net interest margins continues to remain at depressed levels and this is likely to continue over the next few years. We expect to see this channel of weakness persist through much of 2012, before the real estate market starts to trough nearer 2013. During this period, we expect to see non-performing loans, which are presently at historical lows, start to tick up. Moving forward, we also see rising funding costs as an impediment to banks' earnings. We previously highlighted that the surge in yuan deposits was causing an erosion of HKD liquidity, compelling a rise in funding costs, as

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