Link to Fitch Ratings' Report: Changing Landscape for Hong Kong Banks
HONG KONG, January 27 (Fitch) Fitch Ratings says in a new report that Hong Kong banks are facing intensifying competition from foreign banks, in particular from aggressively expanding Chinese banks. As a result, small Hong Kong banks risk being marginalised while their larger counterparts would see their rating upside capped by rising margin pressure.
Foreign and Chinese banks account for about 95 percent of the Hong Kong banking system, as they continue investing in the territory to tap one of the highest-growth markets, greater China. In particular, Chinese banks significantly increased their presence in Hong Kong to about 15 percent of system-wide assets at end-H112 from 9 percent at end-2009.
The foreign bank-dominated market with significant cross-border exposures also renders the system-wide liquidity vulnerable to stress in other banking systems and economies. The system's cross-border claims and liabilities accounted for 51.4 percent and 37.7 percent, respectively, of total assets/liabilities at end-9M12. Claims on China increased substantially to 13.8 percent at end-9M12 from 4.3 percent at end-2008 while claims on Europe declined.
Foreign banks may view the small Hong Kong banks as takeover targets as they look to boost market presence via these banks' established branch network. Chinese banks will continue to expand their Hong Kong operations and use them as an offshore banking platform to source US and Hong Kong dollar funding.
The ratings of the three small banks, Wing Hang Bank Limited ('A-'/Stable), Dah Sing Bank ('BBB+'/Stable) and Chong Hing Bank Limited ('BBB+'/Stable), are most sensitive to competitive pressure, in light of their weaker market position, customer base and regional connectivity. Their market share fell to 2.4 percent at end-H112 from 2.7 percent at end-2009.
The three largest banking groups' (HSBC Holdings ('AA-'/Stable), Bank of China ('A'/Stable) and Standard Chartered ('AA-'/Negative)) domestic operating banks still dominate the Hong Kong market, accounting for 46 percent of the system assets at end-H112. They are well placed to defend their leading positions, supported by broad retail deposit bases, strong brand recognition and wide branch coverage. However, rating upside is limited as competition continues to put pressure on profitability, in turn causing the banks to expand into higher-risk markets, including China via credit lending and minority stakes in Chinese financial institutions.
Growing integration with its weaker mainland owner will continue to be a negative rating driver for the Viability Ratings of Bank of China (Hong Kong) Limited ('A'/Stable) and other subsidiaries of Chinese banks like China CITIC Bank International ('BBB'/Stable).
The report, 'Changing Landscape for Hong Kong Banks: Aggressive Competition from Chinese Banks Limits Rating Prospects', is available at www.fitchratings.com.