Hong Kong banks' earnings to remain weak as coronavirus cripple operations

Around 20-30% of bank branches will likely temporarily close or shorten operating hours.

Whilst local banks are still well-positioned to meet the conflux of operation and financial challenges even with the coronavirus compounding these pressures, the operating environment will deteriorate further the longer the outbreak persists, Fitch Ratings said in a note.

The sector’s outlook remains negative as the weaker economic growth since the beginning of 2019 continues to drag on banks’ profits, further compounded by the COVID-19 outbreak.

Bank earnings are expected to remain weak in the near term. Around 20%-30% of bank branches in Hong Kong are expected to close temporarily or have shortened operating hours, according to the Hong Kong Monetary Authority (HKMA).

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Banks in the city have sufficient capital and liquidity buffers or parental support to weather the current operating environment. Relief measures introduced by Hong Kong and Macao banks for residential mortgage loans and other types of personal and SME lending should also alleviate near-term asset quality and profitability pressures caused by the nCov outbreak.

“The average common equity Tier 1 and impaired loan ratios across Fitch's rated portfolio were estimated at around 16% and 0.6%, respectively, at end-December 2019. Moreover, less than 1% of mortgage loans were in negative equity compared with June 2003, when as much as 30% of these loans were in negative equity,” Fitch Ratings stated.

Further, the loan-to-value ratio for new mortgages was only 53% in December 2019 compared with 65% in June 2003.

The outbreak further adds to the economic challenges already faced by Hong Kong since last year, the city having been hit by a triple whammy of protests, the trade war, and a slowdown in the Chinese economy, all of which has hurt business confidence and various sectors’ earnings.

Also read: Banks' profits threatened as nCov hits on credit demand, interest margins

Despite this, local banks remain more insulated from declines in property prices than they were during the SARS period after macro-prudential measures were implemented over the years and bank buffers were built up following the global financial crisis.

Banks are also introducing their own measures to alleviate the burdens of their customers given recent developments. Bank of China (Hong Kong) announced on 6 February that it will introduce special relief measures to help reduce the financial burden for selected mortgage, SME, insurance, credit card and unsecured lending customers. Selected mortgage customers from affected industries such as retail, restaurants, transport, tourism or hotels and entertainment can have the flexibility to repay interest only on their mortgage loans for up to a period of six months, which can be extended by another six months subject to conditions.

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HSBC also announced relief measures of over $3.9b to its customers on 9 February, allowing taxi and public minibus operators to defer principal repayment for up to six months, and borrowers with secured commercial property mortgages to enjoy similar deferral terms for up to 12 months.