Hong Kong banks to experience slight jolt from Basel III

Fitch Ratings says Basel III will not significantly alter trade finance growth.

It noted that Basel III won’t have a large negative impact on Hong Kong banks' trade finance growth. This because an increase in the capital charges and trade finance outflows for the new liquidity rules are likely to be immaterial. There are concerns, however, over a potential increase.

Fitch said the typical capital charges for Hong Kong banks' off-balance-sheet items are likely to remain lower than 2% after Basel III.

Capital charges for on-balance-sheet items vary from bank-to-bank. Charges for most of the products are between 2% and 8% under Basel II, and are not likely to charge significantly.

The Basel committee's announcement last January 6 said that liquidity requirements from trade finance should be moderate, assuming outflow rates from 0% to 5%. This guidance limits pricing and market distortions as it may align local regulatory requirements.

Fitch expects the annual growth in trade-related loans to stabilize to around 20% in 2012-2013 after high growth in 2010-2011 due to expected lower trade volume growth as a result of China's economic slowdown. Banks' appetite for further growth, however, will remain strong because of attractive margins and effects of diversification.

Fitch estimates Hong Kong's surging trade with China to continue as the two economies further integrate. Renminbi-denominated trade finance are expected to increase as more trade is settled in that currency.

Fitch said that 36% of Hong Kong's trade volume was settled in renminbi at the end of September 2012, up from 7% at the end of 2010. The majority of the underlying trades are still settled in US dollars or Hong Kong dollars and the demand for those currencies is likely to remain strong due to low interest rates.