What you need to know about HK banks’ EU exposure

Can HK banks dispel the risks from European banks’ fundings?

According to a release, Fitch Ratings says in a new report that Hong Kong banks should be able to withstand major contagion risks from deterioration in Europe, including the risk that European banks withdraw their funding from Asia.

The Hong Kong banking sector is dependent on funding from banks in the US, UK, Japan, China and Singapore which, taken together, funded 17% of system wide assets. However, at end-June 2011, Western European banks (including those in the UK) provided only 8% of Hong Kong banks' total liabilities which compares to liquid assets of 55%.

"Hong Kong banks remain vulnerable to general aversion to bank risk and waning investor confidence in global growth in general and China in particular", says Sabine Bauer, director in Fitch's Financial Institutions team.

"Core revenues and capitalisation should however continue to hold up well and Fitch anticipates that Hong Kong banks would eventually slow down their expansion to China if liquidity were to tighten drastically."

The banks' gross exposures to Greece, Ireland, Italy, Portugal and Spain are modest amounting to 4.2% of consolidated equity at end-June 2011. Their exposures to Western European banks amounted to a more material but not overly pronounced 9% of system-wide assets or 88% of system-wide equity. Hong Kong banks have reduced their total Western European exposures by 43% since end-2007.

Hong Kong banks' consolidated Tier 1 ratio of 12.5% at end-June 2011 remains strong but it may somewhat understate market risks including the risk of widening credit spreads in the current volatile environment.