The sector is suffering from its mainland exposure.
According to BMI Research, Hong Kong banks have significant exposure to the slowing mainland China economy (accounting for 45.4% of overall lending in September 2016), and analysts therefore expect the sector to perform poorly over the course of 2017.
"We believe that the territory's banks will adopt a cautious approach towards lending to Chinese corporates, particularly to state-owned enterprises (SOEs) as compared with the private sector, given that the profit outlook for the former is still poor."
BMI Research adds that the Hong Kong monetary authority (HKMA) is also concerned about the potential negative impact on the financial stability of the city-state's banks as asset quality in the mainland will likely worsen further.
"Even though Hong Kong banks are strongly capitalised, with a total capital ratio of 19.4% in September 2016, the HKMA will likely urge the territory's banks to pare down their lending to Chinese SOEs."
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