What are the key risks to buoyant Hong Kong banks?

Intricate Mainland ties are both boon and bane.

Hong Kong banks can rest easy knowing that their growth prospects over the next 18 months are largely stable as the SAR’s strong economic performance is expected to lend further support to profitability, according to Moody’s Investors Service.

Although Moody’s expects economic growth to slow from a high 3.8% in 2017 to 3.2% in 2018 to 2.5% in 2019, market conditions are still in the favour of local lenders.

"Whilst liquidity will tighten as the US Federal Reserve raises policy interest rates, higher interest rates will lead to a widening in banks' net interest margins and an improvement in their overall profitability," Sonny Hsu, a Moody's vice president and senior credit officer said in a statement. 

Capitalisation is also expected to remain strong, with internal capital generation supporting asset growth.

However, bank lending has been under growing pressure after slowing to 9.5% in July which represents its weakest showing since January 2017 amidst fears of rising borrowing costs. 

“Funding conditions will tighten as Hong Kong's currency peg dictates that its policy rates will follow similar trends to those in the US. Potential fund outflows could create liquidity management challenges for some mid-sized banks, and cause Hong Kong dollar rates to rise faster than those for the US dollar.”

Despite the gradual pick-up in market interest rates, banks are likely to maintain stable asset quality as debt repayment burdens for corporates and individuals remain manageable.

However, key risks that could push up the banking sector’s bad loans include growing Chinese exposure and accumulation of household debt.

Also read: Close Chinese ties raise Hong Kong banks' compliance risk

The continued uptrend of housing prices also pose risks to banks who may have to grapple with the fallout of mortgage defaults.