Credit rating agency Fitch Ratings recently released a report indicating that the Hong Kong dollar’s peg to the U.S. dollar has led to an increase in borrowing costs following the rise in U.S. interest rates. This development has resulted in weaker borrowers facing challenges in debt repayment, putting pressure on the asset quality of Hong Kong banks due to local risk exposure. In fact, the report suggests that the pressure on asset quality from local risks may soon surpass that originating from exposure to mainland Chinese real estate.
Should the situation deteriorate further, banks with lower viability ratings could potentially face downgrades in credit ratings, posing risks to their financial stability. Fitch Ratings forecasts that this year, the cost of credit for Hong Kong banks will decrease as risks associated with domestic borrowing, particularly in the real estate sector, lessen. However, the extent of this decrease will be constrained by the overall credit quality in Hong Kong.
For example, in the first quarter of the year, HSBC Holdings (00005) recorded a credit cost of 27 basis points for its Hong Kong operations, lower than the average of 42 basis points from the previous four quarters. Nonetheless, the proportion of total credit costs in Hong Kong has risen from 31% to 66%, while commercial real estate credit costs in mainland China contribute only 20%. Fitch Ratings estimates a 1.3% increase in risk-weighted assets, primarily driven by a higher concentration of credit risk in Hong Kong loan portfolios.
According to the agency, the pressure on Hong Kong property prices could lead to further devaluations, especially for banks heavily reliant on real estate-related loans or using real estate as collateral. For instance, by the end of last year, Shanghai Commercial Bank saw an increase in its non-performing loan ratio by 1.9 percentage points to 2.8%, largely due to some Hong Kong corporate borrowers facing repayment difficulties as the coverage of collateral decreased.
Moreover, substantial write-offs and additional provisions for impaired loans have pushed up Shanghai Commercial Bank’s credit costs from 28 basis points in 2022 to 178 basis points last year. The bank has consequently revised its asset quality outlook from stable to negative in response to these developments.
Fitch Ratings further highlighted that it has maintained a negative outlook on risk portfolio ratings and asset quality for Hang Seng Bank (00011) since last year due to the bank’s exposure to risks in the local property market. Should the asset quality of Hang Seng Bank’s Hong Kong loans weaken significantly, there may be a heightened risk of downgrades in viability ratings.