Fee income will improve in the next 12-18 months.
Hong Kong banks report good profitability with return on assets of 1.1% in 2016. Moody's expects Hong Kong banks to report mostly stable profits in 2017. Although rising interest rates should lead to wider margins, intense competition on high-quality borrowers and higher loan impairment charges due to the implementation of IFRS 9 in 2018 will partially offset the positive impact of higher margins.
Here's more from Moody's:
Even though the US Federal Reserve raised policy interest rates by quarter percentage points in December 2016, March 2017 and June 2017, one-months HIBOR has only increased very modestly since mid-2015, due to ample liquidity conditions in Hong Kong. The relative modest increase in HK dollar interbank rates weigh negatively on banks' margins and profitability.
Banks' fee income should improve in the next 12-18 months, as capital market activities pick up and loan growth recovers from 2016, underpinning brokerage and loan- elated fees income. Banks are also actively selling mutual funds, insurance, and treasury products to retail and corporate customers, which bolster their profitability.
Meanwhile, we expect limited operational efficiency gains as banks’ average cost/income ratio was already low at 43% in 2016. Credit charges will rise in 2018 as banks adopt IFRS 9.
Under the new accounting rules, banks will need to assess their credit risk on an expected basis, rather than an incurred-loss basis. This should lead to more volatile credit charges for banks in future years. Banks reported very low credit costs of around 30bps in recent years.
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