HK bankruptcies herald economic downturn, risks for banks

By Susan Fenton

HONG KONG, Oct 20 (Reuters) - A spate of corporate bankruptcies in Hong Kong highlights the territory's vulnerability to the credit crisis and the slowing global economy, clouding the outlook for its banking sector.

In the past two months, six Hong Kong companies have appointed provisional liquidators, including jewellery maker 3D-Gold Jewellery Holdings (0870.HK), formerly Hang Fung Fold, as well as retailer U-Right (0627.HK) and toy maker Smart Union (2700.HK), a supplier to Mattel Inc MAT.N and Disney (DIS.N).

As more businesses are expected to succumb to the pressures of rising costs, weakening demand and difficulty in finding funding amid the credit crisis, analysts say bankruptcies will surge and are cutting their earnings forecasts for Hong Kong banks.

"We believe this is only the beginning of the credit deterioration cycle for Hong Kong banks," Citigroup said in a research note on Monday.

"Retailers and exporters are likely to feel the most pain, given declining property prices, shrinking consumer spending, falling export demand and tightening bank credit."

The Hong Kong General Chamber of Commerce on Monday forecast the territory is heading for a recession, possibly from this quarter. It projects 0-1 percent economic growth in 2009 as the economy feels the effect of a U.S. recession, slower trade and easing growth in mainland China.

"This is the worst economic environment of our lives," said David O'Rear, the chamber's chief economist. "It isn't a slump, a contraction, a downturn or a correction. Companies need to look to their cashflow in anticipation of a very rough ride in 2009."

PRUDENT LENDING

In the banking sector, Citigroup sees Bank of East Asia (0023.HK) as most sensitive to rising credit costs, citing its relatively low profitability.

"We estimate that every 50 basis point increase in credit cost would lower BEA's fiscal 2009 earnings by 30 percent, compared to 14 percent for Bank of China (HK) (3988.HK) and 9 percent for Hang Seng Bank (0011.HK)," the note said.

Morgan Stanley on Monday slashed its earnings estimates for Bank of East Asia and said its share price, which has already plunged 60 percent this year, could slump to HK$15, from HK$20.80 at Monday's close.

Hang Seng Bank, a unit of global lender HSBC (HSBA.L)(0005.HK), is Morgan Stanley's top banking stock for 2009 because its earnings should outperform the sector thanks to prudent lending and because it did not sell mini-bonds offered by collapsed U.S. investment bank Lehman Brothers.

Thousands of Hong Kong investors in the bonds lost money and banks that sold the bonds have agreed to compensate them.

The investment bank cut its earnings estimates for smaller banks Wing Hang Bank (0302.HK) and Dah Sing Financial (0440.HK), saying aggressive growth in their loan books in the past two to three years will result in sharply higher credit costs.

A potentially sharp rise in bankruptcies in southern China, as well as in Hong Kong, adds to banks' deteroriating outlook.