Hong Kong banks' Mainland China exposure jumped to 16.5%

Will this be a consistent trend?

According to Moody's, Hong Kong banks have substantially increased their Mainland China exposures to 16.5% of consolidated total assets at end-2012, up from 9.8% at end-2009. This trend is set to continue, as banks expand their onshore presence and support the cross-border trade and investments of Mainland corporations.

For the most part, the banks have mitigated risks on their Mainland lending by seeking collateral for onshore lending and bank guarantees on offshore lending.

Here's more from Moody's:

Nevertheless, the nature of Hong Kong’s banking system is changing rapidly as banks increase their China-related lending and Hong Kong companies derive an increasing part of their business from China.

While this is an opportunity for the banks and their corporate customers, it also entails risks, with future credit performance likely to be different from past experience.

Our risk assessment for the banks stands in contrast to their broadly stable and strong financial metrics. Hong Kong banks continue to rank among the highest-rated banks globally, and their credit strengths include their solid capitalization, sound funding profile, conservative loan-to-value ratios and established retail franchises. These strengths create buffers that will protect the banks if and when asset quality deteriorates. Our outlook is a directional view on credit quality and should be understood in the context that we consider Hong Kong’s banking system as one of the strongest globally.

Our negative outlook on the banking system contrasts with our stable outlook on the Hong Kong government’s Aa1 rating. Our sovereign outlook places more emphasis on the government’s strong fiscal position, which we expect would remain, despite our negative outlook for the banking system.