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Moody's Investors Service says that the outlook for Hong Kong's banks is stable as prudent cost management has allowed for stable earnings against the backdrop of almost zero growth and depressed loan margins.
This outlook incorporates Hong Kong economy's ongoing structural transformation towards a more competitive cost structure and new growth prospects, it said.
In the mean time, Hong Kong's banks need to address the same competitive issues they faced in the past, albeit amplified by the uncertainties brought on by SARS and the weakness in the global economy.
The conclusions were contained in a just-released Moody's outlook on Hong Kong's banking system, titled "Resilient in Face of Mounting Stress."
"Because SARS is being brought under control, it will exert a significant, but transient impact, on the local economy. Furthermore, there will be a noticeable impact on bank earnings and asset quality this year," says Wei Yen, the report's author and a Vice President and Senior Credit Officer at Moody's.
But it is important to realize that "SARS is considered only a minor perturbation, rather than a structural challenge, to Hong Kong banks," Yen adds.
At the moment, Moody's concern is focused on the banks' consumer portfolios, which are already under great pressure from rises in personal bankruptcies, in turn, the result of Hong Kong’s rising unemployment.
The extent to which the banks can recoup their SARS-prompted losses depends on how fast consumer confidence rebounds, the report says.
More banks may re-visit their merger strategies, given the challenges of the operating environment. The smaller players will find it harder to stay competitive and may look favorably on being acquired by larger banks with stronger franchises and better staying power.
Additionally, an increasingly competitive environment will further polarize Hong Kong's banks. The larger institutions will increase their dominant position in mortgages and other commodity-type products, while the smaller entities will have to focus more on niches based on service and relationships.
Many of the smaller entities have also formed banking syndicates, or bank consortiums, sharing the costs of developing products.
"But we are uncertain how effective these consortium will be. And it will be hard for them to become dominant players, given the conflicts of interests between their members," Yen says.
(Xinhua News Agency May 27, 2003)
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