Hong Kong banks’ credit quality may be at risk over the medium term because of short supply of the local currency caused by strong loan growth last year and rising yuan demand, KPMG LLP said.
The city’s banks expanded their gross loan portfolio by 29 percent last year, while total customer deposits only grew 7.5 percent, boosting their loan-to-deposit ratio to 62 percent from 52 percent, KPMG said in a report today. The report follows a Hong Kong Monetary Authority request in April that local lenders reassess credit growth and funding plans.
“While Hong Kong’s banking sector has remained highly profitable over the past year, executives recognize that there are some dark clouds on the horizon,” Martin Wardle, head of financial services at KPMG in Hong Kong, wrote in the report. “Liquidity concerns are intensifying, driven by local cross- border dynamics, as well as global economic sentiment.”
Hong Kong dollar liquidity is becoming a concern for local banks as growth in local-currency deposits lags behind loans as customers favor the appreciating renminbi, Wardle said. The Chinese currency has gained about 3.5 percent against the dollar this year, compared with the Hong Kong dollar’s 0.2 percent slip.
Yuan deposits in Hong Kong jumped almost ninefold to 609 billion yuan ($95.7 billion) at the end of August from about 63 billion yuan at the end of 2009, according to data from the city’s de-facto central bank.
“While expectations of currency appreciation remain, transfers of renminbi will continue to erode some of the liquidity in Hong Kong’s banking system,” Wardle said.
The city’s banking system is still “healthy” overall, as impaired loans at Hong Kong banks accounted for less than 2 percent of their total lending last year, according to KPMG. The banks were well capitalized with a consolidated capital adequacy ratio of almost 16 percent, the report said.
HSBC Holdings Plc (5)’s Hong Kong unit, the most profitable bank in the city last year, reported a 0.9 percent bad-loan ratio last year. Hang Seng Bank Ltd. (11), the lender posting last year’s highest return on equity among its Hong Kong rivals, had bad loans that accounted for 0.4 percent of its portfolio.