How Hong Kong Banks will milk gains from household debt curbs

Will the curbs also affect China-related lending?

Fitch Ratings says in a new report that new stress testing requirements on personal loans in Hong Kong will protect borrowers from excessive debt accumulation and limit banks’ exposure to a potential interest-rate hike. This adds personal loans to the authorities’ focus on mortgages.

The changes, however, do not impact the banks’ China-related lending, which Fitch expects to remain the major asset-quality pressure point for which supervision will likely intensify in 2014.

Fitch expects banks to adopt tighter underwriting standards for personal loans by linking debt-servicing ratios to loan tenors. The banks’ methods for pricing should improve as banks adopt internal stress-testing for a 300bp increase in loan pricing, as required by the Hong Kong Monetary Authority. Furthermore, separate liquidity stress tests will address banks’ resilience in light of increasingly volatile fund flows.

Banks’ risk appetite for personal loans varies. Personal loan exposure ranged from 11.6% of total loans at Shanghai Commercial Bank Ltd (A-/ Stable) to 1.1% at Industrial and Commercial Bank of China (Asia) Ltd (A/Stable) at end-1H13.

Fitch has maintained Hong Kong at the highest Macro Prudential Indicator (MPI) of ‘3’ since November 2010, flagging systemic risks from fast loan growth. Hong Kong’s leverage is one of the highest in Asia, with domestic corporate credit/GDP ratio at above 180% and household credit/GDP at 65%.