Latest Hong Kong mortgage data confirm limited risks to banks

Macro-prudential measures to remain in place.

The latest mortgage data from the Hong Kong Monetary Authority (HKMA) confirm that the banking sector's risks from residential real estate exposures are manageable, says Fitch Ratings.

According to a release from Fitch Ratings, furthermore, the relatively robust macro-prudential measures constraining the mortgage market are likely to remain in place through the remainder of 2014.

Yet Fitch maintains Hong Kong at its highest level of macro-prudential risk (MPI-3), and continues to highlight potential systemic pressures from rapid corporate and China-related lending growth.

Here’s more from Fitch Ratings:

Hong Kong residential mortgage data through the first seven months of 2014 indicate a slight pick-up in lending growth, and a rise in the loan-to-value (LTV) and debt-servicing ratios for new mortgage loans. The increases have been marginal relative to the last few years, and risks in this sector remain manageable for the banking system as a whole.

Average LTVs for new residential mortgages approved during July 2014 were 57%, up slightly from 56% a year earlier but still well below the 61% historical average since 2000 and recent peak of 66% in September 2009. Borrowers' monthly debt payments also remain manageable at 36% of income - down from over 40% in 2010.

Fitch believes that the macro-prudential measures enacted by the HKMA are working to keep mortgage lending in check, and are likely to remain in place for the time being. Mortgage loan growth was relatively mild, coming in at 4.6% for the 12 months up to July 2014, below nominal GDP growth of 4.8% and overall loan growth of 16.2%.

Loosening of restrictions - including increasing LTV limits, and debt-to-income rules and reducing stamp duty - is likely to occur only in the event of a sustained decline in residential property prices, something not indicated in recent data.

As such, the immediate risks to the Hong Kong banks from their small direct exposure to domestic real estate - mortgages accounted for just 5% of system-wide assets at end-July 2014 or 12% including commercial real estate loans - are limited.

Furthermore, total housing leverage, at 44% of GDP, remains moderate relative to other developed markets despite rising steadily from its historical low of 31% in 2007.

The indirect risks are of greater relevance owing to the use of property as collateral for other lending. A downturn in the market would be likely to spill over to other sectors, for example SME lending, and could hamper overall economic activity, household wealth and confidence.

The profitability of the mortgage loan business is likely to remain low - the proportion of low-margin HIBOR-priced mortgages versus higher-margin prime-rate priced mortgages has jumped from an average 22% of new loans in 2013 to 80% in July 2014. Furthermore, system-wide capitalisation will decline in line with the 15% regulatory risk-weight floor.

Fitch continues to highlight rapid China-related expansion as the principal pressure point for the sector, with system-wide loans exceeding 3X domestic GDP. The rapid rise in overall leverage has been a key factor in Fitch maintaining the territory's MPI-3 rating, indicating a high level of macro-prudential risk and potential systemic stress.