More challenging environment for HK economy and banks anticipated: Moody's

Due to rising interest rates in 2015.

Moody's forecasts a more challenging enviroment for Hong Kong's economy and banks, amid its statement that its outlook for the state's banking system remains negative, as it has been since June 2013.

The uneasy road ahead is due to the rise of interest rates in 2015 following a long period of extremely easy monetary conditions and a significant rise in credit, according to a release by Moody's which details the conclusions contained in its just-released "Hong Kong Banking System Outlook."

Moody's says that its outlook on Hong Kong's banking system over the next 12-18 months remains negative, and cited key risks that underpin the negative outlook as the banks' growing exposures to Mainland China, deteriorating credit conditions in the Mainland, asset market imbalances in Hong Kong's economy, and the government's proposals on revised bank resolution regimes.

Here's more from Moody's:

Moody's report points out that the banks' Mainland exposures grew 14% in 2013, and accounted for 20% of their total assets at end-2013 versus 18% at end-2012.

The report notes that the key drivers behind the strong growth in the banks' Mainland exposures are Mainland and overseas corporates' expanding cross-border trade and investment activities, relatively low funding costs in Hong Kong compared to China, and credit demand diverted to Hong Kong from China due to tighter liquidity conditions in the Mainland.

According to Moody's report, the banks have so far maintained conservative credit standards on their Mainland-related lending and report good asset quality metrics.

However, the rapid growth in their Mainland-related business and the transformation in their financial profile entail risks, as the banking system evolves as an important offshore financial conduit for Mainland China.

The strong growth in Mainland business will pressure some of the banks' liquidity profiles and capitalization levels.