Hong Kong Monetary Authority Deputy Chief Executive YK Choi suggested on Tuesday that although Hong Kong's banking system is strong, it faces challenges from the intense competition and potential volatility in global financial markets as a result of the sub-prime fallout and possible economic slowdowns in the US and UK.
He urged the sector to remain prudent in loan underwriting, and to ensure the use of loans is consistent with the borrowers' declared loan purposes.
Speaking at a press conference earlier this week, Mr Choi observed that the banking sector remains highly liquid, well capitalised and profitable. The liquidity ratio rose from 50.7% in December 2006 to 51% in September last year. The loan-to-deposit ratio for all currencies rose from 47.9% to 48.6%.
Bolstered by fundraising activities in the stock market, deposit growth was strong, he stated. Deposits for all retail banks rose 19.5% in last year's first three quarters while domestic loans grew 21.3%.
The classified loan ratio fell from 1.11% in 2006 to 0.89% in September while the mortgage delinquency ratio dropped to 0.11%. The number of negative equity mortgages also fell from 8,400 in 2006 to 1,900 in December.
The net interest margin rose from 1.80% to 1.86%, the cost-to-income ratio dropped from 42.7% to 39.9%, and the average consolidated capital adequacy ratio fell from 14.9% to 13.6%.
Mr Choi went on to reveal that net interest margins had improved amid sharp increases in operating costs, adding that strong profit growth had more than offset higher operating costs.
However, he warned that profitability of individual banks may be affected due to exposure to sub-prime related issues or the widening of credit spread.
He suggested that challenges for the sector remain, due to keen competition, the impact of sub-prime issues and volatilities in global financial markets.
He also stated that the first-wave impact of the sub-prime problem is still filtering through the system, while the second wave will also affect the global economy and financial markets.
Noting that macroeconomic adjustments on the Mainland could increase market volatility, Mr Choi warned that credit quality may worsen.
He added that the Authority will closely monitor the impact of US sub-prime fallout on individual authorised institutions, and will watch their asset quality and review the adequacy of their systems in managing credit risk.
Commenting on the review of the Monetary Authority's work on banking stability, Mr Choi said it will make recommendations on the focus and priorities of banking supervisory functions and policies to be developed in the next five years.
To enhance technology risk management, the Authority will ensure that authorised institutions have adequate resources for capacity planning for Internet banking and online securities trading systems.
It will also work with the Association of Banks and Police, to develop an effective customer education programme to promote sound control practices and awareness of emerging fraudulent techniques on Internet banking, Choi concluded.
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