Lehman Brothers' mini-bond fiasco weighs on HK banking system outlook

Tags: Hong Kong banking sector

Written by Moody's Investors Service
Tuesday, 29 December 2009 16:52

HONG KONG: Moody's Investors Service says its outlook on the Hong Kong banking sector is to remain negative as the banks could still be vulnerable to further volatility in the global economy even as their sound-management reputation was impacted by the Lehman Brothers' mini-bond fiasco.

The ratings agency said in a report today, that despite Hong Kong's banks weathering the latest financial crisis without too much damage while the economy is gradually recovering, a change in the outlook to stable would be premature.

"Hong Kong banks could still be vulnerable to further volatility in the global economy and their reputation for sound management has been damaged by the Lehman Brothers' mini-bond fiasco. In addition, their earnings prospects remain unexciting," says Leo Wah, a Moody's vice-president and senior analyst and author of the report.

"Although the banks' CDO/SIV [collateralised debt obligations/structured investment vehicles] investments did not damage their capital bases, some banks may have made these investments due to peer group pressure. This raises concerns over whether decisions are made with enough consideration of risk-and-return profiles," Wah said.

"Neither are growth prospects for the banks encouraging," he added. He said Hong Kong's banking system was maturing, hence making growth hard to come by.

"Without many traditional drivers, we are concerned that banks could take unnecessary and unjustified risks in their pursuit of growth," he adds.

The report notes that banks' experience of several crises since 1997 and stringent regulatory supervision have helped them avoid the worst of the current crisis without direct assistance from the government.

It also acknowledges that their strong financials, balance sheets and liquid assets have enabled them to cope with market volatility.

According to the report, banks also did very well containing credit risks with a particular focus on cutting exposure to corporate customers thereby protecting asset quality. The Hong Kong government has clearly demonstrated willingness to provide considerable support to the banking sector if needed.

"However, the financial crisis has exposed weaknesses in containing reputation risk and a lack of understanding of investments. The Lehman Brothers' mini-bond chaos could, not only result in large compensation to investors, but has also tarnished the image of banks as a reliable and professional platform for customers to make investments," the report says.