Hong Kong banks’ loans to mainland entities exceed 20%

Assessing the risks to the banking sector

Risks of a property bubble - Property prices have risen significantly in Hong Kong and now seem close to their peaks. This could be a source of some asset-quality concerns for the banks, which remain significantly exposed to this sector (47% of domestic loans). However, a number of mitigating factors should ensure that the downside is not too severe.

Growing mainland exposure - The increased exposure of Hong Kong banks to the mainland via loans (over 20% of loans are to mainland entities) means that a slowdown and liquidity squeeze there could impact the banks’ asset quality in China. However, this is more a medium- to long-term issue in our view, as in most cases banks have been relatively prudent in their mainland growth.

Asset-liability mismatches - CNY appreciation expectations have meant that everybody wants to save in CNH and borrow in HKD/USD. This has been exacerbated by US dollar loan demand from mainland borrowers. Currency and liquidity mismatches, if significant, could heighten risks to the banking sector. At this point, however, we see this more as a profitability issue.