Hong Kong Commercial Banking Report Q1 2009

Abstract

With global economic headwinds gathering at an alarming pace, Hong Kong’s economy looks set to be
buffeted more violently than initially expected. With this in mind, we have revised down our growth
forecasts for the country and are now anticipating a contraction in real GDP in 2009 before a mild
recovery takes place in 2010.
This report is being written at a time when the global financial crisis, which arose as a result of the
evaporation of inter-bank liquidity, has moved into a new phase. Stock market participants appear,
reasonably, to have taken the view that the policy responses taken by governments, central banks and
multi-lateral institutions will be sufficient to prevent a total collapse of the global financial system.
Instead, stock market participants are focusing on the impact of a near-global recession on the earnings of
non-financial companies.
The number and size of stand-by facilities agreed by the IMF since early October supports our view that,
of the emerging markets whose commercial banking sectors are surveyed by BMI, the countries of
Central and Eastern Europe are those whose economies are most at risk of suffering adverse affects as a
result of the global financial crisis. This is partly because the macroeconomic imbalances are relatively
severe and partly because the Central and Eastern European countries are more directly affected by the
brutal recession that is unfolding in wealthier member states of the EU.
As yet, it has not been possible to collate hard numbers, for most of the countries whose commercial
banking sectors are surveyed by BMI, that clearly quantify the impact of the global financial crisis on the
banks. As we explain in the section that discusses changes that we are making to the report, we again
include a lengthy essay which attempts to identify the key issues. In essence, in the emerging markets –
and, indeed, the developed countries – of the Asia-Pacific, commercial banks appear well placed to deal
with the crisis. The same is, broadly, true of commercial banks in the various countries of the Middle East
and North Africa. Latin America, Chile, Brazil, Mexico and Colombia appear better placed than
Argentina, Venezuela, Bolivia and Ecuador. South Africa’s situation appears to have much in common
with that of Brazil. In contrast, Nigeria faces some of the same challenges as those that confront
Venezuela. The positions of most countries in Central and Eastern Europe, however, are alarming.
From Q209, we will include data that pertains to late 2008 and extend forecasts out to 2013. We will also
incorporate much greater discussion of the various protagonists in each country’s commercial banking
sector and a number of new features. We believe that the figures we compiled in mid-2008 provide
insights as to how the various commercial banking sectors will fare in the current, extremely uncertain,
climate. We have, therefore, left them essentially unchanged.
The figures on the tables above provide a snapshot of the banking sector in Hong Kong prior to the onset
of the global financial crisis. To place the figures in context, it may be useful to bear in mind certain
aspects of the 59 countries whose banking sectors are currently surveyed by BMI. Across this sample, the
median growth in assets in local currency terms was 21.3% (in Colombia), the median loan growth was
21.6% (in India) and the median growth in deposits was 17.9% (in Brazil).
On their own, the ratios of loans to deposits, assets and GDP mean little. However, they can provide
useful hints when combined with other data. Across the 59 countries, the median loan/deposit ratio is
92.3% (in Greece), the median loan/asset ratio is 56.0% (in Poland) and the median loan/GDP ratio was
63.9% in India.
As in previous reports, we include a SWOT analysis for Hong Kong. A general theme of this report is that
Hong Kong’s position as the most important international financial services centre in Asia, specifically,
the gateway through which capital is most likely to flow out from China, appears unassailable. Countering
this, Hong Kong remains vulnerable to an economic hard landing in China and/or the USA.
Since Q108, we have calculated, on a consistent basis, a Commercial Bank Business Environment Rating
(CBBER) for each of the 59 countries surveyed. The CBBER includes an assessment of the limits of
potential returns. It does this by taking into account the size, growth potential and bancassurance potential
of the banking sector, as well as aspects of the economy in 2007. The CBBER also depends on an
assessment of the risks to the realisation of potential returns. This reflects BMI’s assessments of overall
country risk, together with the regulatory and competitive environment.
Hong Kong’s overall CBBER is 81.6. The market structure element of the limits to potential returns is
roughly comparable to the country element, with scores of 79.4 and 78.9, respectively. However, the
market risks element of the risks to the realisation of returns scores more highly than the country risks of
the realisation of potential returns, with respective scores of 96.7 and 80.9.