Rating agency Fitch issued a report yesterday, referring to five medium-sized banks, namely Overseas Chinese Yongheng, DBS (Hong Kong), Shanghai Commercial Bank, Dah Sing Bank (02356) and Chong Hing Bank (01111), which have sufficient buffer capacity to cope with economic adversity
Its outlook is maintained at a “stable” rating. However, Fitch stressed that if funds flow out of Hong Kong in a large amount in the future, it will hit their profitability or have a negative impact on the ratings of these banks.
Fitch lowered its long-term credit rating in Hong Kong from “AA+” to “AA” earlier and classified it as a “negative” outlook, but it does not seem to hinder the prospects of local small and medium-sized banks. The report pointed out that although the scope of social unrest is gradually expanding, or the banking industry’s operating environment is facing a further deterioration in the Sino-US trade war, fortunately, the bank’s capital and liquidity coverage is sufficient, and the Linkage System helps to stabilize the funds. The high risk management ability of the banking industry is beneficial to the long-term stability of the financial industry.
Strict control of costs to offset adverse factors
The report also anticipates that Hong Kong’s economic growth will slow down and the unemployment rate may climb. As a result, banks will slowly increase their impairment levels under the new accounting standards. However, the strict control of the cost has always been the strength of the Bank of Hong Kong, which effectively offsets the above-mentioned unfavorable factors. The Hong Kong Government has introduced a number of measures to help SMEs to tide over the economic difficulties and support the stability of the property market. It will also help the bank’s asset quality to remain stable. There is no significant impact in the short term.
When downgrading Hong Kong’s rating earlier, Fitch explained that because of the strengthened links between China and Hong Kong, Fitch has narrowed the gap between the mainland rating (A+) and Hong Kong rating (AA)
This report also mentioned that Hong Kong banks have increased their lending to Chinese-funded enterprises. Although the industry risks have increased, their profitability has also increased. Hong Kong banks with parent support in the Mainland will be more prominent. Fitch stressed that such a large outflow of funds from Hong Kong will hit the profitability of medium-sized banks such as Dah Sing Bank.