Hong Kong banks can hold firm against another housing crash

They can maintain their credit profiles even if prices were to plunge by 30%.

Hong Kong banks are strong enough to withstand another housing crash as S&P Global Market Intelligence estimates that most large banks in the Asian financial centre will be able to maintain their credit profiles even if property prices were to plunge by as much as 30%.

The institutional resilience of Hong Kong’s financial institutions are weaved into the system as de-facto central bank Hong Kong Monetary Authority tightened mortgage-underwriting standards in recent years to curb risks and runaway price growth.

“The authority places loan-to-value (LTV) caps and debt servicing ratio (DSR) limits on property mortgage loans, and applies risk-weight floors on loans to property developers,” S&P added.

Average LTV ratio also remained below 50% as of January 2018 from 64% in 2009 whilst DSR was also low at 34% as of July 2017. Residential mortgage loans delinquency ratio also remained low even after the 1997 housing crash, testifying to the SAR’s economic strength to withstand stressful market periods.

Additionally, banks are required to perform a stress test which assumes an extreme scenario of 300 basis point rise in mortgage payments which provides some level of protection in debt serviceability.

“In our base case, we are not expecting a correction in property prices in 2018. Our base case assumes that residential prices will decelerate to 0%-5%, down from a heated 12% expansion in 2017,” S&P said.