Bank profits may take hit amidst protests

Asset quality will also weaken, according to analysts.

Hong Kong banks can expect tougher times ahead as profitability is likely to take a hit in response to the ongoing social unrest, according to S&P. Credit costs are also likely to rise as asset quality deteriorates.

Despite the rising credit risks, S&P noted that they should remain low and manageable for the sector, even with a significant deterioration in the economic outlook for Hong Kong. S&P earlier revised its forecast for Hong Kong's GDP growth to 0.2% in 2019 and 1.6% in 2020 in September this year, from 2.2% and 2.4%, respectively. The revised GDP growth forecasts are significantly lower than the 3% recorded in 2018.

The recent policy announcement on supporting small and midsize enterprises and residential mortgages could provide some cushion for the economy, the report added.

Also read: Hong Kong urged to boost $2b economic stimulus

“We do not expect the banking sector to materially relax its underwriting standards. We consider Hong Kong's banking industry risk to be the lowest among its peers, mainly aided by prudent regulations and proactive supervision,” said S&P Ratings.

Accordingly, the local banking industry has strengthened its capitalisation over the past two to three years through controlled exposure, regulatory tier-1 capital issuances, sufficient internal capital generation, and, in some cases, asset disposals. This provides banks with more buffer to absorb losses, said S&P.

“Over the past two decades, the Hong Kong banking sector's customer deposit base has remained quite sticky. As of end-August 2019, customer deposits rose by about 2% on a year-to-date basis, compared with about 5% growth in loans. Overall, the loan-to-deposit ratio remains healthy at about 75%,” the report stated.