Small Hong Kong banks dead set on expanding abroad

Blame it on competitive pressure in a mature low interest-rate Hong Kong market.

Fitch Ratings says in a new report that tight control at small Hong Kong banks curbs the pace of their expansion and limits risks associated with new business outside the territory.

The majority of foreign lending is to China whose risks, in Fitch's view, will continue to exceed those related to lending to the domestic property market.

Small domestic banks are keen on expanding abroad, due to competitive pressure they face in a mature low interest-rate Hong Kong market that is exacerbated by the banks' limited pricing power and regional connectivity.

Despite the competitive pressure, the banks have not relaxed their underwriting criteria to defend market share. Their loan growth remains below the sector's average, leading to a fall in their combined share of total loans to 7.2% at H112 from 8.7% in 2009.

Loss-absorbing ability - as measured by profitability, capitalisation and available collateral - against potential asset quality deterioration is adequate. Collateral coverage at the small banks remains high (H112: 78%, 2009: 80%) despite lower coverage for foreign loans.

Pre-impairment profit is under pressure but, at an average of 1.1% of assets in H112, should provide an adequate buffer. Capitalisation is also sound with an average Fitch Core Capital ratio of 13.7% at end-H112.

The small banks' average share of loans for use outside of Hong Kong increased to 38% of total loans at end-H112 from 31% at end-2009 (sector average: 35% at end-2012).

This compares with an average 35% of domestic property loans including residential mortgages at end-H112 (sector average: 33% at end-2012).

Gross mainland China exposures, which include claims on financial institutions, ranged from 55% of total assets at China CITIC Bank International Limited to 17% at Dah Sing Bank at end-H112.

The banks covered in this report are Chong Hing Bank Limited, CNCBI, DSB, Shanghai Commercial Bank Ltd and Wing Hang Bank Limited.