Hong Kong, Macao banks to lead recovery in mainland China exposure

HONG KONG, Jul 15, 2021, Fitch Ratings. Fitch Ratings expects the recoveries in APAC economies in 2021 to support better growth prospects for banks’ mainland China exposures (MCE). We expect Hong Kong and Macao banks, which historically rely more on MCE, to lead the post-pandemic recovery in MCE, given their closer connectivity with mainland China than other markets, Fitch Ratings reported.

All major APAC banking systems saw stagnant MCE as a share of total assets during the Covid-19 pandemic in 2020 due to slower cross-border business activities, Fitch data show. Economic contraction following social restrictions as well as continued geopolitical tensions also pressured growth.

Hong Kong banks’ MCE was stable at 28% of system assets in 2020 (2019: 28.5%) and has stayed within the range of 27%-30% since peaking at 33% in 2014. Macao banks’ MCE declined to 39% of assets from 41% in 2019, but retained the highest concentration because mainland Chinese banks accounted for around 90% of Macao’s international banking assets and liabilities.

Economic policies in the two Special Administrative Regions continue to favour cross-border activities, which support medium-term growth in MCE for their banks, especially if cross-border travel restrictions further relax.

We take into consideration MCE concentration in rating the Hong Kong and Macao banks. Hong Kong banks with higher growth and concentration of MCE, especially the subsidiaries of mainland parents, generally have lower assigned risk appetite scores as these banks typically have higher growth appetite and there is less disclosure over MCE compared to domestic exposures.

However, there was only mild deterioration in the classified loan ratio for mainland-related lending to 0.96% for Hong Kong banks in 2020 (2019: 0.79%) and the non-performing ratio for Macao banks to 0.36% (2019: 0.16%).