[ET Net News Agency, 28 April 2020] Moody's Investors Service said in a new report that
the likely severe downturn in Hong Kong's local economy will hurt bank performance, with
ongoing social distancing and travel restrictions disrupting, in particular, a large part
of the territory's key service industry.
"Mid-sized banks are most vulnerable amid the coronavirus-led downturn, as their
relatively high exposure to small and medium-sized enterprises and unsecured lending to
individuals puts them at risk of higher loan losses," said Sonny Hsu, a Moody's Vice
President and Senior Credit Officer.
"By contrast, larger Hong Kong banks are less affected given their lower exposure to the
most-affected sectors relative to their total assets, with the performance of other major
loan types - such as commercial real estate loans and residential mortgages - likely to
remain resilient," added Hsu.
Moody's expects banks will report lower net interest margins and lower fee income, while
credit costs will rise as asset quality deteriorates. Margins will narrow with declines in
policy interest rates, while fee income will drop because of lower sales of wealth
management products and reduced credit card fees. Banks' credit costs will also rise as
they set aside more reserves amid deteriorating loan quality.
Meanwhile, modest loan and asset growth will help offset the effects on the capital of
weakening asset quality and profitability. Accommodative monetary policies by major
central banks will also contribute to ample liquidity conditions in Hong Kong. Hong Kong
banks mostly retain strong liquidity profiles, which will allow them to weather even
extreme funding volatility.
Moody's baseline scenario assumes that current disruption to global economic activity
will extend into at least July and that consumer sentiment and trade will remain subdued
through the third quarter. A downside scenario with a more pervasive recession that
extends into the financial and real estate industries, pushing unemployment to pass
previous peaks, could widen credit pressure on more banks.
Under this downside scenario, real estate prices, which have risen greatly from their
previous lows during the 2003 SARS outbreak - could enter a severe downturn and challenge
Moody's view that the crisis will have relatively little impact on real estate-related
loans. (KL)