Hong Kong ordered banks to conduct stress tests assuming customer withdrawals of as much as $89 billion over the next year, adding to signs of concern that lenders’ balance sheets have grown too fast.
Banks should assume that half of the HK$1.38 trillion ($177 billion) of customer deposits in local and foreign currencies added since late 2008 will flow out in six to 12 months, the Hong Kong Monetary Authority said in an e-mailed reply to written questions from Bloomberg News yesterday.
Capital may flow out of Hong Kong once the U.S. starts raising interest rates, HKMA Chief Executive Norman Chan said last month. The de facto central bank has said it’s in talks with lenders about slowing credit growth amid concern funding may tighten and cause property prices to slump after they surged more than 50 percent in the past two years.
“The potential problem is that liquidity is tightening in the banking sector,” Paul Lee, an analyst in Hong Kong at Haitong International Securities Group, said by telephone. “When the U.S. ends its quantitative easing, monetary policy and global liquidity will tighten, and this may cause more fund outflows in Hong Kong.”
Renminbi deposits in the city tripled to a record 451 billion yuan ($69 billion) in the last two quarters amid forecasts the mainland’s currency will be the best performer among so-called BRIC nations this year. The Hong Kong dollar has been pegged to the greenback since 1983.
Housing prices in Hong Kong have surged more than 50 percent in the past two years as buyers from China were attracted by the city’s relatively low rates and weaker currency. The government in November increased property transaction taxes and pledged to boost land supply amid public protests over living costs.
Measures to curb speculative investments led to a 37 percent drop in Hong Kong’s new mortgage loan approvals from March to HK$27.6 billion in April, the HKMA said May 23.
Bank loans have also grown faster than deposits, pushing the local-currency loan-to-deposit ratio to 81.7 percent at the end of March, up from 71 percent early last year, the authority said this month.
Rising Funding Costs
“At smaller banks, the loan-to-deposit ratio is probably between 90 to 100 percent so the worry is that smaller banks would have to embark on a potential liquidity chase,” Ismael Pili, head of Asia bank research at Macquarie Capital, said in a phone interview yesterday. “Funding cost will go higher, and margins at these banks would come off.”
The monetary authority’s Chan this week said he was talking to banks with “quite aggressive” loan growth expectations. The central bank also plans to adopt more measures to stabilize the industry if needed.
The stress tests are a preventive measure as the HKMA seeks to prevent potential problems in the banking sector, Lee said.
“The magnitude and pace of deposit outflows are assumptions used for the purpose of stress testing,” the HKMA said in its e-mail. “We have made it clear to banks that it is not the HKMA’s forecast or estimate that such a scenario will actually happen.”
Bank credit expanded at an annual rate of 26 percent in the first two months of this year, the HKMA said in April.
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