By V. Phani Kumar
HONG KONG (MarketWatch) — Shares of Hong Kong banks fell Tuesday after the city’s monetary authority said it will step up vigilance against what it described as “unsustainable” credit growth, and as a research house downgraded some lenders, citing a “potential liquidity squeeze.”
The Hong Kong Monetary Authority (HKMA) — the city’s de facto central bank — on Monday issued a circular to banks, saying it was “necessary” for the regulator to step up monitoring of the lenders’ business plans and funding strategies for the rest of this year, as credit was surging at a much faster rate than the growth in deposits.
Bearish forecast on rising rates
Interest rates reflect economic growth, inflationary fears and investor sentiment, according to Rydex fund manager Kurt Barneby, who says rates are likely to go higher and so remains bearish in his bond-market outlook. Jonathan Burton reports.
The lending binge, which caused the local banking industry’s Hong Kong dollar loan-to-deposit (LTD) ratio to balloon to 78% from 71% over 2010, continued in the first two months of 2011 as well, boosting the industry LTD ratio further to 81%.
“It is clear that the same rapid pace of credit growth is unsustainable,” HKMA Chief Executive Norman Chan wrote to the city’s lenders in the circular.
Watching credit ‘excesses’
Chan said that total loans made by Hong Kong lenders increased 29%, or 940 billion Hong Kong dollars ($121 billion) in 2010, driven by a burst of credit to the property sector and mainland Chinese customers that are not banks.
The expanded loan book, including HK$258 billion of loans made to the property sector, marked a 19% increase over 2010. Exposure to mainland customers — including state-owned banks, Chinese firms listed in Hong Kong or their subsidiaries, and firms controlled by provincial or municipal governments on the mainland — jumped at an even faster clip of 47%, totaling HK$440 billion.
The pace of lending eased somewhat in the first two months of 2011, but still rose at a rapid 26% in annualized terms.
Well before U.S. interest rates move, we foresee rising funding costs and loan-repricing resulting in a contraction in mortgage credit in 2012-13.
– Barclays Capital
Chan said the HKMA’s on-site examination of banks hasn’t yet revealed any dilution of normal or prudent underwriting standards by the city’s lenders, and that most loans made to mainland clients have been backed by collateral or by guarantees from mainland banks.
But the regulator stressed the need for greater vigilance.
“Should the current trend continue for much longer, it will inevitably lead to pressure on funding, liquidity and concentration, as well as concerns about possible lowering of credit-underwriting standards,” Chan wrote in the circular.
Some analysts welcomed the HKMA’s plan to step up vigilance on lending by the city’s banks.
“We have been concerned about the rapid leveraging up of the Hong Kong banking system, and as such, it is encouraging to see the HKMA taking positive steps to cool current excesses,” UBS analysts Stephen Andrews and Steve Ho wrote in a report released Tuesday.