Hong Kong Banking Sector:Hong Kong Banking Sector:2009 End-Year Review and 2009 End-Year Review and

Prospects and Priorities for 2010Prospects and Priorities for 2010

Hong Kong Monetary Authority

21 December 2009

22

Performance of the banking sector (1)Performance of the banking sector (1)

Projections for 2009

• Bleak economic outlook

• Banks’ profitability may be affected by loan loss provisions and narrowing interest margin

• Asset quality may deteriorate

Actual performance in the first three quarters of 2009

• Global economy remains uncertain though some signs of stabilisation

• Loan loss provisions not as severe as anticipated. NIM has narrowed but impact on profitability less than expected

• Deterioration in asset quality observed but still comfortable by historical standards

33

Performance of the banking sector (2)Performance of the banking sector (2)

• Classified loan ratio rose to 1.42% at end-Sep 2009 from 1.24% at end-2008 and a low of 0.81% at end-Mar 2008

• Asset quality remains good compared to historical levels

1.42% (Sep 09)

10.61% (Sep99)

0

2

4

6

8

10

12

Mar-97 Mar-99 Mar-01 Mar-03 Mar-05 Mar-07 Mar-09

%Classified loan ratio of retail banks Asset quality indicators compared to peak

0

20

40

60

80

100

Classified loan ratioCurrrent: 1.42% (Sep 2009)

Peak: 10.61% (Sep 1999)

Ratio of overdue andrescheduled loans

Current: 1.00% (Sep 2009)Peak: 8.58% (Sep 1999)

Credit card charge off ratioCurrent: 4.08% (Q3 2009)

Peak: 14.55% (Q3 2002)

Number of RML in negativeequity

Current: 835 (Sep 2009)Peak: 105,697 (Jun 2003)

RML delinquency ratioCurrent: 0.04% (Oct 2009)

Peak: 1.43% (Apr 2001)

Peak Latest

44

Performance of the banking sector (3)Performance of the banking sector (3)

• Pre-tax operating profit of retail banks dropped 9.7% in the first three quarters of 2009 compared with the same period in 2008

• Net interest margin of retail banks narrowed to 1.50% in the first three quarters of 2009 compared to 1.84% in 2008 – a historically thin level

1.50%(Q1-Q3 09)

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 YTD2009

%

55

Performance of the banking sector (4)Performance of the banking sector (4)

Capital adequacy ratio rose notably from 14.7% at end-2008 to 16.6% at end-September 2009

Capital adequacy ratio of locally incorporated AIs16.6%

6

8

10

12

14

16

18

Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09

%

66

Performance of the banking sector (5)

Other key indicators of retail banks

• Liquidity ratio (quarterly average)

• Loan growth

• Deposit growth

• HK$ loan-to-deposit ratio

2009 2008

47.5% (Q3) 45.0%

1.8% (Oct) 10.6%

8.2% (Oct) 6.6%

62.7% (Oct) 69.4%

77

Key results in 2009 (1)Key results in 2009 (1)

Residential mortgage loans – a long standing supervisory focus given its significance to banks’ loan portfolios

0%

10%

20%

30%

40%

50%

60%

Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Sep-09

as % of loansfor use in HK

RML (including HOS) Investment in residential properties

88

The HKMA has always been vigilant in the supervision of residential mortgage loans

Introduction of 70% loan-to-value ratio (LTV) in 1991

Refinements to LTV to maintain the integrity of the guideline

– Co-financing scheme

– Package RML with personal loans

Interest/principal repayment holiday

Prudence in setting mortgage interest rates

Tightening of LTV ratio for luxury property

Best practices including computation of debt servicing ratio and prudent valuation of property

Key results in 2009 (2)Key results in 2009 (2)

99

Key results in 2009 (3)Key results in 2009 (3)

Investor protection

• Implemented recommendations of the Lehman Report, including audio recording and physical segregation

• Simplified selling process by RIs concerning relatively simple investment products

• Minibond Repurchase Scheme

• Investigations and disciplinary actions

– Around 22,000 complaints– 77% handled– Target to complete the remaining 5,000

investigations by March 2010

1010

Key results in 2009 (4)Key results in 2009 (4)

Financial stability and other supervisory initiatives

• Work with international standard setting bodies to enhance banking regulatory policies – capital adequacy and liquidity

• Consultation on remuneration system

• Review of Deposit Protection Scheme

• Consultation on AML/CFT legislation

1111

Outlook of the banking sector for 2010 (1)Outlook of the banking sector for 2010 (1)

• Operating environment remains difficult

• Financial markets stabilising but uncertainty remains

– Timing in exit of quantitative easing strategies adopted by major economies

– Funds flow might increase market volatility and risk of asset bubble

1212

Outlook of the banking sector for 2010 (2)Outlook of the banking sector for 2010 (2)

• Message to banks

– Need to be vigilant in risk management

– Need to maintain adequate capital and liquidity to cater for potential market volatility

– Due consideration to impact of a reversal of funds inflow and interest rate movements

• Key message to investors

– Beware of highly uncertain market environment in making investment decisions

– Home-buyers should consider loan repayment affordability if current interest rate returns to a normal level

1313

Priorities for 2010 (1)Priorities for 2010 (1)

Preparations for exit from full deposit guarantee

• Tripartite working group with Singapore and Malaysia to co-ordinate exit strategy

• Enhance protection under DPS before end of 2010

• Publicity campaign to be launched to introduce enhanced DPS and remind the public of the expiry of the guarantee

• Continue to monitor AIs readiness for the uplift of full deposit guarantee

• AIs to rigorously assess implications for their funding and liquidity management

1414

Priorities for 2010 (2)Priorities for 2010 (2)

Enhancement of the regulatory framework

• Continue to participate in the work of international standard setters

• Complete legislative amendments for Basel II enhancements

• Participate in quantitative impact study covering Basel’s enhancements

• Finalise guidance on liquidity risk management, to be followed by compliance review

• Support implementation of new legislation for AML/CFT and develop industry guidelines

1515

Priorities for 2010 (3)

Supervisory and enforcement focus

• Enhance surveillance of RIs’ regulated activities to ensure compliance with enhanced selling procedures

• Onsite examinations of AIs’ Mainland subsidiaries

• Review of AIs’ compliance with RML policies

• Benchmark review of AIs’ stress testing policies and processes

• Target to complete Lehman-related investigations by March 2010