Hong Kong banks' mortgages to remain benign: Fitch

Risk factors include stretched affordability and high LTV mortgages.

Fitch Ratings expects the quality of Hong Kong banks' mortgages to remain benign. "We believe that gradually rising interest rates will have a limited impact on borrowers' interest burden. In addition, the Hong Kong Monetary Authority's (HKMA) seven rounds of macro-prudential measures protect banks against price shocks. Unemployment will be an important driver for credit losses, but we expect this to remain low."

Here's more from Fitch:

Fitch believes that the major property-related risk stems from commercial real estate (CRE) and contagion risks. CRE is more vulnerable than residential properties to a slowdown of the economy, as Hong Kong's retail sales outlook remains lacklustre. We believe that a significant portion of CRE lending is China-related, while office demand may be supported by Chinese companies coming to Hong Kong.

We believe there is significant contagion risk as a large proportion of lending to small and medium-sized corporates is secured by property collateral. Property-related sectors account for 18% of GDP and a large share of individual wealth. In addition, banks' property revaluation reserves represent 11% of Fitch-rated banks' Fitch Core Capital.

Our ratings reflect the expectation that mortgage loan quality will remain sound, with moderate mortgage growth in 2016 compared with 9% in 2015 - and just a modest increase in mortgage NPL ratios and loan impairments, notwithstanding a likely more noticeable increase in negative equity loans. Key drivers for higher arrears would be a sharper-than-expected economic downturn and higher unemployment.

The major drivers of continued demand from China amid rising economic integration, limited housing supply, low albeit rising interest rates, steady economic growth (2014-2017F: 2.5% per year) and a stable labour market remain unchanged. This would be despite a broader economic slowdown and some early signs of a weakening in the property market.

Risk factors include stretched affordability and high LTV mortgages - both being vulnerable to a sharper-than-expected economic slowdown - and a risk-averse attitude towards the property sector as well as China which could lead to substantial fund outflows.

System-wide property loans stood at a moderate 11.3% of assets at end-1H15 (Singapore: 28.2%). The banks with above-average concentration include Hang Seng Bank Limited (24% of assets), Standard Chartered Bank (Hong Kong) Limited (23%) and OCBC Wing Hang Bank Ltd (23%).