HKMA orders stress tests as it anticipates net outflow of HK$690b in next 6-12 months

The Hong Kong Association of Banks (HKAB) warned on Friday that local banks may slow their lending growth if they fail the stress tests on deposit outflows required by the Hong Kong Monetary Authority (HKMA).

"If some banks fail their stress tests, HKMA will discuss the results with these banks to determine what actions they should take. I think the lending growth of these banks may slow down in due process," said acting HKAB Chairman Lo Chung Hing at Friday's briefing.

Earlier this week, the HKMA - the city's de facto central bank - ordered Hong Kong banks to conduct stress tests, assuming outflows of as much as HK$650 billion ($89 billion) in the next six to 12 months as it is worried about banks' liquidity.

In a circular sent to local banks, the HKMA said that nearly HK$1.38 trillion ($177 billion) has flown into the local banking system since 2008. It said that local lenders should reasonably assume that half of the total inflow will flow out of the local banking system.

Local banks are expected to finish their stress tests and submit their results to the HKMA within a month.

The robust lending annual growth rate of nearly 29 percent to HK$940 billion in the city last year has made the HKMA worry that the lenders' balance sheets have grown too fast. Strong credit growth has raised the loan-to-deposit ratios of local banks to jump to 81.7 percent at the end of March from 71.2 percent in early 2010. Some market analysts said that the loan-to-deposit ratio of some local smaller banks may even jump to 90 to 100 percent.

"At smaller banks, the loan-to-deposit ratio is probably between 90 to 100 percent so the worry is that smaller banks would have to embark on a potential liquidity chase," Ismael Pili, head of Asia bank research at Macquarie Capital, told Bloomberg on Thursday. "Funding costs will go higher, and margins at these banks would come off."

Strong credit growth has been reflected in the buoyancy of the local property market where more home buyers and investors had applied for mortgage loans despite skyrocketing home prices in the city over the past few years. The low interest rate environment and a weakening currency - the Hong Kong dollar is pegged to the US dollar - made property an attractive investment for wealthy mainlanders, locals and foreign investors alike. Prices have risen more than 50 percent in the past two years.

"But as the global financial market situation is still uncertain, the HKMA is taking the prudent approach by asking local banks to conduct stress tests," HKAB's Lo said.

But one banker told China Daily that the lending business cycle itself plays a more important part in determining the future growth rate of the local lending business.

"The results of the stress test will not immediately affect the lending policy of local lenders as they have already been previously determined by the management," said Hang Seng Bank General Manager Andrew Fung. "The lending criteria of local banks depends on its risk management policy, regulatory requirements and the cost of capital of different banks."

China Daily

(HK Edition 05/28/2011 page2)