(Corrects assets under management for Aberdeen to more than
$100 bln in Asian equities from $25 bln earlier in 5th graf, and
clarifies role of Barings' Fong in 17th graf)
* BEA H1 net profit hits record HK$3.58 bln vs HK$3.38 bln
* BEA says asset quality to remain under pressure in H2
* HK banks have increased their mainland exposure in recent
By Saikat Chatterjee
HONG KONG, Aug 1 The first of Hong Kong's banks
kicked off earnings on Friday with the biggest family-run lender
posting a record interim profit after giving more loans to
mainland borrowers, renewing investor focus on credit lines to
China and the risks they pose.
Bank of East Asia, which reported a 6 percent
increase in first-half net profit to HK$3.58 billion ($462
million), said it would take steps to mitigate credit risks in
China where it expected asset quality to remain under pressure
in the second half of the year.
The growing exposure of Hong Kong banks to the mainland in
recent years has grabbed headlines about their ability to
scrutinise credit risks against the backdrop of a slowing
Chinese economy. Rating agencies and supranational bodies such
as the International Monetary Fund have openly voiced concern.
Long praised by investors for their sound risk management,
Hong Kong's mid-sized banks are increasingly becoming more
exposed to any blowup in default risk as they hunt for new
opportunities in the mainland amid sluggish growth at home.
"Hong Kong banks' exposure to China has been rising for a
while, and we would be cautious of any sharp rise in exposure
because they may not have the requisite expertise to analyse the
underlying credit risks on the ground," said Frank Tian,
portfolio manager and part of a team that manages more than $100
billion in Asian equities at Aberdeen Asset Management.
Data from the Hong Kong Monetary Authority (HKMA), the
city's de-facto central bank, shows a sharp rise in cross-border
business. By the end of 2013, the exposure of Hong Kong banks to
corporate borrowers constitutes a fifth of their total assets
compared with around 5 percent in 2007.
While the HKMA has repeatedly said a significant share of
the non-bank mainland exposure is backed by guarantees and is
symbolic of a strong financial centre, the fact remains the
ability of a Dah Sing Bank or a Wing Hang Bank
to absorb big losses is far less than their foreign
counterparts such as Standard Chartered or HSBC
For example, Bank of East Asia, a medium-sized city lender,
would require only roughly 15 percent of its net loan book going
sour to wipe out its entire equity base, according to its 2013
Bank of East Asia said loans to customers in mainland China
edged up 9.5 percent to HK$207 billion at the end of June from
end-December. Those loans comprised roughly half of its total
Bad debts as a percentage of total loans rose to 0.44
percent in the first half from 0.39 percent at the end of 2013.
"A tipping point may be reached if the yuan depreciates very
sharply or if loan books are expanded aggressively," said
Under an extreme scenario presented by the IMF in May, if
the default rate in the mainland banking system's interbank
obligations hits 80 percent, the losses would wipe out all the
capital in the city's banking system.
System-wide, non-performing loans as a percentage of their total
loan book remains below 1 percent so far.
Bank of East Asia said at an earnings briefing on Friday it
expects to see more stress in China's property sector due to
maturing products from trust companies, which pool money from
rich people and companies to make high-interest loans and are
part of the China's vast and opaque shadow banking system.
Shares of the bank closed 0.6 percent lower on Friday, in
line with a 0.9 percent drop for the benchmark Hang Seng Index
To be sure, the city's lenders are among the best
capitalised in the world with average capital adequacy ratios of
more than 15 percent and system wide NPLs at 0.04 percent.
Even in its China business, much of the credit risk in the
mainland is towards state-owned enterprises and to finance
non-mainland companies' operations within China. Trade finance
thanks to the growing internationalisation of the yuan has also
"This means high default rates are unlikely," said William
Fong, investment director of Asian equities at Barings Asset
Management. He is also a member of Barings' Hong Kong China
equity team that managed $2.8 billion of assets as of June 30.
Notwithstanding their growing China exposure, Hong Kong
banks command some of the highest price-to-book ratios within
the region due to their sound risk management techniques which
saw them escape the 2008 financial crisis unscathed.
That said, investors are wary that banks which have expanded
their footprint aggressively in China - whether for trade
finance or corporate lending - may be most at risk at a time
when other foreign banks have pulled back.
While this is an opportunity for the banks and their
corporate customers, it also entails risks, with future credit
performance likely to be different from past experience, Moody's
strategists wrote in a March report.
($1 = 7.7498 Hong Kong Dollars)
(Reporting by Saikat Chatterjee; Editing by Anne Marie Roantree
and Ryan Woo)