Moody's: Hong Kong's Banking System Outlook Remains Negative

In a new report, Moody's Investors Service says that the outlook on the Hong Kong banking sector is to remain negative. Despite the fact that Hong Kong's banks have weathered the latest financial crisis without too much damage while the economy is gradually recovering, a change in the outlook to stable would be premature, says the report.
"Hong Kong banks could still be vulnerable to further volatility in the global economy and their reputation for sound management has been damaged by the Lehman Brothers' mini-bond fiasco. In addition, their earnings prospects remain unexciting," says Leo Wah, a Moody's VP/Senior Analyst and author of the report.
Wah notes that although the banks' CDO/SIV investments did not damage their capital bases, some banks may have made these investments due to peer group pressure. This raises concerns over whether decisions are made with enough consideration of risk-and-return profiles.
"Neither are growth prospects for the banks encouraging. Hong Kong's banking system is maturing, making growth hard to come by. Without many traditional drivers, we are concerned that banks could take unnecessary and unjustified risks in their pursuit of growth," he adds.
The report notes that banks' experience of several crises since 1997 and stringent regulatory supervision have helped them avoid the worst of the current crisis without direct assistance from the government during the crisis. It also acknowledges that their strong financials, balance sheets and liquid assets have enabled them to cope with market volatility.
According to the report, banks also did very well containing credit risks with a particular focus on cutting exposures to corporate customers thereby protecting asset quality. The Hong Kong government has clearly demonstrated willingness to provide considerable support to the banking sector if needed.
However, the financial crisis has exposed weaknesses in containing reputation risk and a lack of understanding of investments. The Lehman Brothers' mini-bond chao not only could result in large compensation to investors, but has also tarnished the image of banks as a reliable and professional platform for customers to make investments, says the report.

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