Heightened Mainland lending pose risks to Hong Kong banks after rising 21% in 2017

The bulk of PRC lending is geared towards lower credit quality firms like SMEs.

The growing mainland China exposure (MCE) of Hong Kong banks suggests a growing risk appetite that lenders should be wary of, according to credit rating agency Fitch, as the bulk of the lending is directed to lower credit quality companies like SMEs.

Hong Kong banks MCEs rose 21% in 2017 with non-bank exposures clocking in at 15% whilst claims on Chinese banks surged 40% last year. Preliminary data also shows that non-bank exposure has hit 14% in Q1 as Hong Kong continues to account for about half of global MCE.

Also read: Close Chinese ties are both boon and bane for Hong Kong banks

Although Fitch maintained that China-related lending is not negative in itself, further exposure without adequate controls and capital buffers in place could have a negative ratings impact.

“That said, we continue to see MCE as Hong Kong banks' biggest concentration risk, even if it has performed well so far,” Fitch warned.

Lending for state owned enterprises accounted for almost half at 41% of Mainland related lending although loans to private entities have been picking up pace after growing from 18% to 25% as of end-March. However, lending to foreign entities edged down from 35% to 34% over the same period.

The credit rating agency earlier downgraded its assessment of Hong Kong banks' operating environment due to its intricate ties with the Mainland whose governance standards are substantially lower than Hong Kong's.

“We believe that Hong Kong's growing connectivity with China's economy and financial system creates risks for the robustness, effectiveness and independence of Hong Kong's regulatory and legal frameworks,” Fitch noted in an earlier report.