HKMA strikes a cautious note on territory’s banking sector

The Hong Kong Monetary Authority (HKMA) is closely monitoring the "latent systemic impact" of continued "rapid" credit expansion in the territory, according to its annual report published on April 30. The HKMA is specifically concerned the "unusually low interest margin" in the Hong Kong banking sector might drive excessive risk-taking by banks.

The HKMA called for banks to be "extra prudent" in their risk management, and added that, despite regarding the territory's banking sector as "robust", there is the possibility of "contagion" as a result of the eurozone sovereign debt crisis – specifically the risk of large capital outflows.

The monetary authority and bank regulator said it took a number of supervisory actions in 2011 following a "sharp" increase in lending by the territory's banks that in combination with a slower increase in the rate of deposits saw pressure exerted on the banking sector's liquidity positions. The HKMA said that while the average liquidity ratio of retail banks declined from 39.3% to 38% in 2011, this was still "well above" the statutory minimum requirement of 25%.

The HKMA reduced growth forecasts for 2012 as it predicted "stiff headwinds" from the global economy to hit the territory, notably a decline in exports from eurozone countries. Growth for 2012 is now forecast to be between 1.6–3.9%, down from 5% in 2011, and 8% in 2010.

The continuing sovereign debt crisis in the eurozone is also regarded as a significant "downside risk" to Hong Kong's growth prospects, as is the prospect of any "sharper-than-expected" slowdown in the mainland Chinese economy.

The anticipated slowdown in growth will have a manifest impact on the rate of inflation, which is expected to decline from 5.4% to 4.3% in 2012 as demand-side pressures recede and the output gap narrows.