Fitch: Hong Kong Banks Can Withstand Severe Shocks, Test Shows

Dah Sing Banking

31/05/2016 11:41

(The following statement was released by the rating agency)

Link to Fitch Ratings' Report: Hong Kong Banks' Stress Test: Resilient Enough to 
Withstand External Shocks

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879418

HONG KONG, May 31 (Fitch) Hong Kong banks are well prepared to withstand 
challenges from a downturn in the credit cycle due to the adequacy of their 
capital positions and earnings buffers, Fitch Ratings says in a new report. This 
is the conclusion of Fitch's analysis on 13 banks after subjecting them to a 
mild and severe scenario in which their average NPL ratios reached 1.9% and an 
unprecedented 8%, respectively, over a three-year assessment period.

The banks' average Fitch Core Capital (FCC) ratio had fallen to 11% by the end 
of the assessment period in the worse of the two scenarios we created - from 
15.9% at the start - enough to ensure systemic stability, results of our test 
shows.

A slowdown in the Chinese economy and turmoil in the Hong Kong property market 
are the key assumptions of this stress test, with the more severe of the two 
scenarios having more disruptive and lasting effects on banks. Loan-impairment 
charges (LICs) would rise to 6.9% of loans under the severe scenario, and is 
likely to lead to ratings downgrades if such a scenario were to materialise. Our 
assumptions lead to cumulative average LICs of 1.4% of loans under the base 
scenario, a level we consider realistic, and against which we have been 
benchmarking our ratings.

Mainland China Exposure (MCE) is the single-biggest risk for Hong Kong banks, in 
our opinion. In this exercise, MCE accounted for on average 56% of the samples' 
LICs in the severe scenario (base case: 58%). Fitch's key assumptions in the 
severe scenario include NPL ratios having reached 7.5% for Chinese state-owned 
enterprises at end-2018 (base case: 1.5%), 8% (2.5%) for MCEs to non-mainland 
entities, 20% (5%) to private mainland borrowers and 5% (1%) for claims on 
Chinese banks. 

A direct impact would stem from higher borrower default rates and difficulties 
in collateral enforcement. Furthermore, we assume the banks set aside reserves 
for 70% and 80% of impaired loans in the base and severe cases, respectively, as 
we take account of the risk that collateral arrangements may not hold up as per 
the banks' expectations. 

Fitch acknowledges that the assumptions made in our severe-case scenario are 
very harsh, and likely to be beyond the expectations of most market 
participants. Our assumptions take into account historical episodes of system 
stress as well as Hong Kong banks' considerate underwriting policies and sound 
prudential supervision. However, they also reflect our view that the growing 
links between Hong Kong and China and the banks' expansion in the mainland 
Chinese market will potentially leave a more pronounced impact than the stress 
observed previously. We did not specifically adjust for banks' benefitting from 
guarantees from their (state-owned) parent entities due to limited disclosure.

Domestic property exposure has been a traditional area of concentration in the 
Hong Kong banking system, yet historical losses have been relatively well 
contained, and the authorities have implemented various measures to limit the 
effect of significant property corrections. 

Fitch's full report, 'Hong Kong Banks' Stress Test - Resilient Enough to 
Withstand External Shocks' is available by clicking on the link and available at 
www.fitchratings.com

Contact: 

Primary Analyst 

Sabine Bauer 

Senior Director

+852 2263 9966

Fitch (Hong Kong) Limited

19/F Man Yee Building

68 Des Voeux Road, Central

Hong Kong

Ivan Lin

Associate Director

+852 2263 9984

Shanice Lu

Analyst

+852 2263 9924

Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: 
wailun.wan@fitchratings.com.

Additional information is available on www.fitchratings.com

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