Hong Kong banks’ credit losses to revert to pre-COVID levels before end-2022

The increase in credit losses in 2020 was manageable compared globally.

The local banking sector’s credit losses are expected to decline faster than anticipated over the next two years, and revert to pre-COVID levels before 2022, reports S&P Global Ratings.

The city’s GDP growth is expected to improve to about 6.5% in 2021 before moderating to 2.5% in 2022, supported by policy initiatives, strong economic growth in China, and a pick-up in global trade.

This points to lessening risks for banks’ asset quality, S&P said, and will push Hong Kong banks’ credit losses to likely normalize to their 2019 levels sooner than the earlier expected end-2022.

“The banking sector's credit losses should therefore decline faster than we anticipated over the next two years,” S&P said in its report, Banking Industry Country Risk Assessment: Hong Kong. “In our view, the banking sector's fundamentals remain solid, with banks having strong capital and liquidity buffers.”

Timely fiscal stimulus, an accommodative monetary policy, and increasing vaccination coverage will support the recovery. A moderate increase in credit growth for the banking sector and property prices is also likely.

Any risk from the extension of the relief measures also remains limited.

“We do not expect any significant asset quality problems from the unwinding of the relief measures. Hong Kong banks extended loans mainly to non-delinquent borrowers, and the majority of the loans have already returned to normal repayment schedules,” the rating agency added.

Compared globally, there are also relatively low risks in Hong Kong’s banking system. The increase in Hong Kong banks' credit losses in 2020 was reportedly manageable in a global context, thanks to reasonably tight underwriting standards, and government support targeting corporates and households.