Hong Kong banking system hurt by high China exposure

Outlook becomes negative from stable.

It said Hong Kong banks are increasingly reliant on the mainland because real interest rates in the city remain low amid surging property prices. Moody’s said these circumstances may contribute to adverse future operating conditions for Hong Kong banks.

It also said rising bad loans could accelerate in the coming months, an event that does not bode well for Hong Kong banks borrowing from the mainland. Non-performing loans at Chinese banks rose for six straight quarters through March 31, the longest deterioration in nine years.

Hong Kong lenders have mitigated risks from mainland lending by requiring collateral and bank guarantees, Moody’s said. Moody’s noted that 17 banks in Hong Kong led by HSBC Holdings Group Plc, Hang Seng Bank Ltd., Bank of China Ltd. and Standard Chartered Plc, accounted for 70% of total the city’s domestic loans in 2012.

The one-day repurchase rate in China hit an unprecedented 13.91% on June 20 before easing on signs targeted injections of funds are being used to ease a cash crunch that threatens to worsen the economic slowdown.