Hong Kong second highest-rated banking system globally

Financial profiles are strong, asset quality metrics are sound.

It has been noted that Hong Kong is the second highest-rated banking system globally on a standalone basis.

According to a report from Moody's Investors Service, Hong Kong banks' credit ratings reflect their strong financial profiles, with sound asset quality metrics, strong capitalization, and good liquidity positions.

Nevertheless, the report also mentioned factors that pose risks to banks’ credit profiles: high and rising property prices and increasing corporate and individual leverage.

Other factors are slowing Mainland economic growth, as well as lower likelihood of government support with revision of resolution regime.

Here's more from Moody's Investors Service:

The presentation noted that problem loans are likely to increase from current low levels. It cited that banks’ onshore Mainland exposures have deteriorated amid challenging credit conditions, and that offshore Mainland exposures and Hong Kong loan asset quality are holding steady. However, problem loans are likely to increase as policy interest rates rise and Mainland economic growth slows down.

The report also said that higher credit costs will partially offset margin widening when interest rates rise. Operating return on average assets (ROAA) remains sound, according to the presentation. Further, policy rate increases will lead to wider margins and overall profitability, although positive impact to be partially offset by lower spreads on RMB assets and loans to high-quality borrowers. Cost efficiency remains good, and credit costs are likely to rise from current exceptionally low levels, but should remain manageable relative to preprovisioning income.

Meanwhile, systemic support will weaken with introduction of revised bank resolution regime. The report said revised bank resolution regime with bail-in provisions is credit negative for creditors. It cited lower likelihood of future government support, the fear of financial contagion, highly interconnected nature, and the unlikelihood of support to be withdrawn completely for systemically important banks.

The report also mentioned safeguards for creditors should help minimize loss given default. Involved here are the intention to preserve hierarchy of claims, the aim of the government to ensure creditors are no worse off in future bank resolutions than they would be in liquidation, and that most large banks are subsidiaries of foreign or Mainland banking groups. Parental support is likely in times of stress before government support becomes necessary.