Hong Kong Commercial Banking Report Q3 2008

Over the last year, the crisis in the inter-bank market, and the soaring prices of oil and other raw materials, tended to obscure several other important trends. In most of the developing world (i.e. the vast majority of the countries whose banking industries are surveyed by BMI), lending has been growing quickly. In many emerging markets, inflationary pressures have been boosted by a rapid increase in credit. In a number of emerging markets, macro-economic imbalances are evident.

The figures on the tables above provide a snapshot of the banking sector in Hong Kong and the changes that have taken place within it over the last year. 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). 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). The median loan/GDP ratio was 63.9% in India.

From Q308, we have included a new section that examines the risks associated with each country's banking sector in a new way. We have essentially sought to ask this question: to what extent will the banking sector likely need to source funding from banks in the rest of the world over the course of 2008.

Given that the answer is not necessarily, on its own, meaningful, we have looked at other key issues such as the size and recent movement in the loan/deposit ratio, macro-economic developments and recent movements in financial markets.

Two general themes pervade the banking sectors of the Asia-Pacific region. The first is that the excess savings within Greater China and Japan remain enormous and are likely to grow. One expression of this will be the continuing growth in bank deposits that is, in absolute terms, considerably greater than the growth in lending. The second is that central banks have, in much of the region, been moving to tighten monetary policy. This has already had an impact on the behaviour of the banks.

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 (and, specifically, the gateway through which capital is most likely to flow out from China) appears unassailable. The counter-part to this is that 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 (79.4 versus 78.9). 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 (96.7 versus 80.9).