Fitch: HK Banks Unlikely to be Affected by New Prudential Rules
Fitch maintains that large and rising China exposures remain the greater source of risk for Hong Kong banks over potential stresses in the local property market.
The 27 February HKMA decision to lower maximum loan-to-value (LTV) and debt-service ratios further, while applying the 15% risk-weight floor for mortgage lending to a wider base, follows ongoing concern from the HKMA over the sustainability of the rise in property prices and household leverage - the latter having risen to over 64% of GDP.
Mortgage loan growth re-accelerated in December 2014 to 8.8% yoy from 4.1% yoy in June, driven by strong demand for small-sized flats. We believe that the authorities' choice for another round of tactical macro-prudential policies over more aggressive implementation of the countercyclical capital buffer requirement, suggests a focus on curbing demand - some of which may be speculative in nature in the property market - and, by extension, protect household wealth.
Fitch estimates the revised floor rule will drop affected Fitch-rated banks' Fitch Core Capital (FCC) ratio by a manageable 10bp-30bp. Average LTVs for new residential mortgages approved in January 2015 were already below the new 60% maximum, at 54.5%, while Fitch estimates the average LTV for the mortgage loan book as a whole is only 30%-40%. Furthermore, borrowers' monthly debt payments remain manageable at 35.5% of income.
It is notable that Hong Kong banks' gross mainland China exposure (MCE) has exceeded the loans to the domestic property market since 2010. We expect China-related lending growth will continue to grow at the current rate in 2015, as certain funding requirements remain in place and banks increasingly adopt a more cautious stance in light of more instances of China-related loans having turned sour. Gross MCE grew by 20.9% in the 12 months to September 2014 to 3.1x capital, mainly to state-sponsored entities (including banks) and non-mainland borrowers.
Mainland Chinese bank subsidiaries in Hong Kong have among the highest gross MCE of up to 9x FCC for those under our coverage. Chong Hing Bank recorded faster relative growth in gross MCE among the banks that already reported their end-2014 MCEs, at 4.4x FCC at end-2014 - up from 3.5x at end-2013. This was attributed to strong appetite for trade loans, corporate debt and syndicated lending following the acquisition by a Chinese conglomerate in 2014, leading to an exceptional 88% growth in corporate exposure and 69% in bank claims.
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