HONG KONG: Banks operating in Hong Kong performed better than previously expected during the first three quarters of the year in terms of both profitability and asset quality, the Hong Kong Monetary Authority (HKMA) said yesterday.

Loan loss provisions made by banks in the first three quarters were not as severe as previously feared, Y.K. Choi, Deputy Chief Executive of HKMA told reporters at a press briefing.

The impact of narrower net interest margin (NIM) on banks' profitability was also less severe than anticipated, despite the fact that average margin shrank to a historically thin level of 1.50 percent in the first three quarters from 1.84 percent last year, he said.

As a result, banks beat the HKMA's expectation in terms of profitability, with the aggregate pre-tax operating profit for the whole sector falling only 9.7 percent during the period compared with a year ago, despite the worst global financial crisis in decades.

On concerns that certain banks may swing to the red this year due to the financial crisis, the Deputy HKMA Chief Executive said "it is still too early to speculate whether there will be any bank suffering a loss this year as we are still waiting for operating figures for the fourth quarter, which are very significant for the whole-year results."

Banks saw improvement in their operating performance every quarter, in general, he noted.

"I won't exclude the possibility that some banks may even perform better this year compared with last year," he added.

Meanwhile, banks' asset quality remains good compared to historical levels, even though some degree of deterioration was observed, the HKMA said.

The classified loan ratio - the portion of questionable loans over total loans - rose to 1.42 percent at end-September from 1.24 percent at the end of last year and a low 0.81 percent at end-March last year.

However, the latest ratio was far lower than the historical peak of 10.61 percent recorded at end-September of 1999 following the onset of the Asian financial crisis.

Meanwhile, the delinquency ratio of residential mortgage loans, which accounted for over 40 percent of aggregate bank loans, stood at 0.04 percent at end-October, significantly lower than the 1.43 percent historical peak at the end of April of 2001.

Local banks remain highly liquid and sound, Choi said, noting that banks' capital adequacy ratios averaged 16.6 percent at end-September, up from 14.7 percent at the end of 2008.

However, the Deputy HKMA Chief Executive said he will not rule out the possibility that some local banks may need to raise fresh capital in the future, once the Basel Committee on Banking Supervision tightens tier-1 capital requirements for banks as planned.

On worries over recent capital outflows, Choi said the HKMA can handle the situation effectively with the help of the long-tested currency link system.

He attributed the recent outflows of money to remittance activities by foreign-based firms ahead of their year-end book closing as well as remittance of IPO money by newly listed overseas firms.

However, he reminded banks and investors once again to be vigilant against the potential impact of a reversal in capital inflow and a rise in interest rates in the future.

Asset prices could become volatile once an ultimate reversal in capital inflow happens, while homebuyers' loan repayment affordability could be strained when interest rates finally rise, Choi said.

(HK Edition 12/22/2009 page4)