Hong Kong Banking Sector: EndYear Review

1
Hong Kong Banking SectorEnd-Year Review

• Hong Kong Monetary Authority
• 21 January 2000

2
Main tasks in 1999

• Preparations for Y2K
• Monitoring of asset quality
• two rounds of examination of local banks
• refinement of guidelines for loan classification
  and provisioning
• Involvement in corporate workouts
• helping to revise the Hong Kong Approach
• arbitration in some problem cases
• monitoring of progress on GDE and other
  Mainland-related cases

3
Main tasks in 1999 (2)

• Development of our Policy Response to the Banking
  Sector Consultancy Study
• Enactment of the 1999 Banking Amendment Ordinance

4
Balance sheet developments

• Banks have plentiful liquidity due to
• continuing growth in deposits (8.2 yoy to Nov
  99)
• continued decline in domestic loans (-8.7 yoy to
  Nov 99)
• Part of the excess liquidity has gone into
  increased holdings of HK debt securities and
  foreign currency assets
• As the economic recovery gathers pace, domestic
  lending should also revive
• the increase in Nov 99 is the first sign of this

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Margins

• The excess liquidity is putting downward pressure
  on lending margins, particularly on residential
  mortgages
• But it also has a beneficial impact on funding
  costs
• spreads between BLR and short-term rates are back
  above pre-crisis levels (currently 468 bp for the
  one-month deposit rate)
• However, in setting the lending margins on
  long-term loans, banks need to beware of the risk
  that funding costs may rise

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Asset quality

• The available statistics and feedback from the
  banks suggest that NPLs are near their peak
• There are signs of improvement in particular
  sectors like credit cards and taxi loans
• The GDE settlement should improve sentiment in
  relation to Mainland credits
• Further bad debt provisions will arise from the
  downgrading of existing NPLs
• But the banks generally expect the bad debt
  charge to be significantly lower in 2000

7
Profitability of local banks

• It is difficult to generalize about the outturn
  for 1999 because of wide variations in the
  performance of individual banks
• In aggregate, pre-provision operating profits are
  expected to have improved in 1999 due to
• growth in average interest-bearing assets
• maintenance of the net interest margin
  (reflecting lower funding costs)
• reduction in operating expenses

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Profitability of local banks (2)

• There has also been some moderation in the growth
  of the aggregate bad debt charge compared with
  1998
• But some banks have continued to see sharp
  increases in provisions in 1999
• Looking ahead to 2000, the banks are generally
  expecting recovery in profits
• This is largely driven by the expected reduction
  in the bad debt charge in 2000

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Work priorities in 2000

• Implement recommendations of the Consultancy
  Study
• study on deposit protection in H1
• study on credit register in H1
• review in H1 whether safe to proceed with first
  stage of interest rate deregulation on 1 July
• review three-tier structure in H2

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Study on deposit protection

• The first stage of the study will consist of a
  report by external consultants
• The aim is to try to appoint the consultants and
  for them to start work before the end of March
  2000
• We hope that the work of the consultants can be
  completed by end-June
• We would then study their conclusions and,
  subject to Excos approval, publish a set of
  proposals for wider consultation by end-Sept

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The objectives of the consultancy study on
deposit protection

• To make recommendations on the most appropriate
  features of a deposit insurance scheme for HK if
  such a scheme were to be introduced (which has
  not been decided)
• To identify and evaluate viable alternative means
  of deposit protection (such as enhancing the
  existing priority claims scheme in the Companies
  Ordinance)

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The objectives of the consultancy study on
deposit protection (2)

• To consider the relative costs and benefits of
• deposit insurance
• alternative means of deposit protection
• maintenance of the status quo (ie no change)
• To produce a set of recommendations on which of
  the possible options (including no change) would
  best meet the needs of the HK banking system and
  its depositors
• To outline the action steps needed to implement
  any recommendations for change

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Work priorities in 2000 (2)

• Finalize guideline on corporate governance
• Implement risk-based supervisory approach
  (including review of supervisory policies)
• Develop policy on, and enhance supervision of,
  e-banking
• try to recruit IT specialists to form an
  examination team
• reconvene the HKMAs Study Group on Electronic
  Banking
• issue further guidelines on e-banking issues

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Work priorities in 2000 (3)

• Finalize arrangements for supervision of exempt
  dealers
• HKMA will remain the front-line regulator for
  exempt dealers and will devote more resources to
  the supervision of these (three teams of
  examiners)
• exempt AIs will be subject to broadly the same
  regulatory standards as licensed intermediaries
• some of these will be applied through the new
  Securities and Futures Bill and some through the
  Banking Ordinance (amended as necessary)
• a revised MoU will be signed with the SFC

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Other issues for 2000

• Monitor progress on consolidation
• Continue to monitor banks asset quality
• Supervision of banks MPF business
• Review policies on money laundering and conduct
  selective on-site examinations
• Review and update Code of Banking Practice
• Continue to enhance financial disclosure by banks
• Participate in the development of the new Basel
  Capital Accord