Hong Kong corporates scrambling to pay debts

Corporate exposure rising as banks lend more.

The Hong Kong Monetary Authority warns that the ability of Hong Kong companies to pay their debts has “showed a marked deterioration."

“There are some initial signs that the credit risk of banks’ corporate exposures may be building up,” HKMA said in its latest monetary and financial stability report.

HKMA estimates that interest coverage ratios have worsened over the past three years. This ratio measures the ability of companies to pay debt service with the revenues they generate. Corporate leverage ratios or the value of a company’s assets on their balance sheet to their debt have also eroded.

HKMA believes the reason for this is because of more and more debt, and business performance not keeping pace with this rising debt.

Lending to corporations grew 13.2% in the first half from 3% in the second half of 2012. Loans to companies constitute 70% of Hong Kong banking loans compared to 21.5% for mortgage lending.

HKMA believes the banks it regulates have enough capital to weather a storm but is worried that when the US Federal Reserve cuts back on its monetary stimulus in October, Hong Kong will feel it.