Hong Kong banks to suffer structural slowdown

Loan growth is predicted to be muted at 3%.

Hong Kong banks will suffer from the structural slowdown in the mainland Chinese economy, and BMI maintains its forecast for overall loan growth in the territory to grow at a muted rate of 3.0% in 2017. 

The territory's banks are likely to take a cautious approach towards lending to Chinese state-owned enterprises due to their weaker profit outlook. BMI added that Asset quality in these SOEs will also worsen, but the strong capital positions of Hong Kong banks should provide a buffer.

Here's more from BMI:

We expect Hong Kong's banking sector to perform poorly over the course of 2017 as the mainland Chinese economy remains mired in a structural slowdown. Structural weaknesses such as the dominance of inefficient state-owned enterprises (SOEs), still significant excess capacity in the industrial sector (particularly coal and steel), and a corporate debt overhang will continue to weigh on China's economic growth.

We therefore maintain our forecast for overall loan growth in Hong Kong to grow at a subdued rate of 3.0% in 2017 (compared with an average of 5.4% over the past three years).

Indeed, according to our calculations using data from the Hong Kong Monetary Authority (HKMA), the exposure of the Special Administrative Region (SAR)'s banks to the mainland has remained on an uptrend since December 2015.

Mainland-related lending accounted for 45.4% of overall loans in September 2016. We believe that Hong Kong banks will adopt a cautious approach when lending to corporates operating in the mainland amid the ongoing structural slowdown, as the number of profitable lending opportunities decline. In particular, we expect lending to SOEs to remain weaker than that to the private sector. According to figures from the HKMA, loan growth to mainland state-owned entities came in at 4.4% y-o-y in September 2016, which was lower than the expansion of 14.4% y-o-y recorded for mainland private entities.