The ratings agency also changed the outlooks for the bank financial strength ratings (BFSRs)/Baseline Credit Assessments (BCAs) of eight Hong Kong banks to negative from stable, and one bank’s BFSR outlook to stable from positive.
In a statement, Moody’s said its concerns over interest rates and the banks’ exposure to the Mainland, along with "potential property bubbles in Hong Kong", could result in "adverse operating conditions for Hong Kong banks over the outlook horizon".
It added: "Residential, commercial, and industrial property prices in Hong Kong have all more than doubled since 2009, and are currently at historically high levels. There is growing integration between Hong Kong’s economy with that of the Mainland.
"While the economic integration creates business opportunities for banks and their customers, it also entails risks. The Mainland’s transition from an export- and investment-driven economic growth model to a consumption-led model creates uncertainties and may expose overcapacity in certain industries."
Of the nine banks whose ratings Moody’s changed, all reported problem loan ratios that were at or near historically low levels at end-2012, and their current asset quality metrics "compare very favorably against global peers". However, "latent risks are building in the banking system, as domestic leverage increases, and the exposures to the Mainland grow.
"Moody’s anticipates a turning point during the outlook horizon, when these banks’ problem loans will rise from current low levels as conditions become more challenging. While the precise timing of the turning point cannot be determined with precision, a tightening of US monetary policy, which directly affects Hong Kong via the Hong Kong dollar peg, is likely to be one trigger for a cyclical deterioration in asset quality."
China loans seen ‘healthier’ option
In its report on the Moody’s downgrade today, the South China Morning Post quoted Nicholas Kwan, research director at the Hong Kong Trade Development Council, as saying that the banks’ dependence on the Mainland – as measured as a percentage of consolidated total assets at the end of 2012, compared with the level reported at the end of 2009 – was "not high when compared with the city’s dependence on mainland tourism and trade, which might be in the 60 to 70%" range.
"An increase in lending to mainland firms is in fact a good thing because I can’t see how local banks can survive purely on local borrowers, made up predominantly by the property sector – which in my view is even more unhealthy in terms of the loan portfolio," Kwan, a former head of a regional research team at Standard Chartered, was quoted as telling the SCMP.
Hong Kong banks were still among the highest-rated banks globally, and their credit strength and sound funding could protect them from any increase in bad loans, Kwan added.
The banks also mitigated risks in their mainland lending by seeking collateral for onshore lending and bank guarantees for offshore lending, he told the SCMP.
