HONG KONG: The Hong Kong Monetary Authority's (HKMA) warning about unsustainable price competition in the mortgage market has raised concerns about banks' operating risks. However, credit experts believe that local lenders are generally still in good shape.

Risk aversion is the key reason behind lenders' current extraordinary thirst for mortgage business, Ken Sansom, president for Asia Pacific at Experian, explained to China Daily in an exclusive interview.

Many financial institutions - including those in Hong Kong - are frightened by the global financial crisis, he said. Accordingly, they have become more conservative and are looking for more secure sectors to lend their money to, he added.

The mortgage market is the perfect place for banks to park their money as they emerge from their shells after the worst of the financial crisis, the credit expert said.

Mortgage lending in Hong Kong is considered much safer than other credit, such as trade financing, in the sense that mortgage loans are secured by local real assets, while trade financing is exposed to external factors.

For this reason, trade financing and lending to other sectors has continued to decline, while mortgage lending has kept on rising over the past several months.

Latest data from the HKMA, the city's de facto central bank, indicate that lending to the wholesale and retailing sector, the manufacturing sector and the trade sector fell 4.9 percent, 9.6 percent and 28.6 percent respectively in the second quarter from a year ago.

Meanwhile, property lending -mostly mortgage lending - still managed to climb 3.4 percent year-on-year in the same period.

Banks' seemingly unquenchable thirst for mortgage transactions has put them into a bitter price war, with some lenders offering mortgage rates as low as P-3.25 percent (P stands for prime rate, now at 5.25 percent), the lowest level in 19 years since mortgage record-keeping was initiated.

The ultra-low mortgage rates have aroused concerns at the HKMA, which has warned banks against operating risks that will likely surface once the current easy monetary conditions reverse.

"We are concerned that intense market competition may have driven some authorized institutions to price their mortgages aggressively to such an extent that they may not have given due regard to the reputation risk, interest rate risk and liquidity risk potentially associated with their pricing," the regulator warned lenders last week.

However, Experian's Sansom believes that local banks remain in good shape after absorbing the negative impact of the financial crisis.

"By and large, banks in the region are healthy....It is a great time to be an Asian bank now," he said, specifically noting that "Hong Kong banks in general are quite healthy. They have strong balance sheets," adding, "They are more conservative. That is why they focus more on the mortgage market".

The local mortgage market will continue to do well. Banks will continue to offer attractive mortgage rates, he predicted.

"The good news is that Hong Kong is not anywhere near the bubbles that the US has gotten into," he said, commenting on concerns about potential credit risk in the mortgage market.

The Experian executive also cited the generally strong financial health of local consumers as a basis for his optimism.

"It is not just banks that have become more conservative, but also the people," he said.

With the global economy slipping into recession last year, people have chosen to save more money as they became nervous about the future, while homebuyers have tended to lower their leverage, he noted.

This has resulted in a lower loan-to-deposit ratio for the whole banking sector and stronger affordability for homebuyers, he continued.

A lower loan-to-deposit ratio will help reduce banks' liquidity risk while stronger homebuyer affordability will lower default risk.

The loan-to-deposit ratio of the local banking sector declined sharply to 70.8 percent at the end of July this year from a high of 83.8 percent in August 2008, just before the global financial crisis erupted.

Meanwhile, homebuyers currently need to set aside only about 35 percent of their monthly income for monthly mortgage installments, compared with a generally acceptable 50 percent and a high of 70 percent during the property boom in 1997.

Thanks to the strong homebuyer affordability, the delinquency ratio of mortgage loans remained at a marginal 0.06 percent as of the end of July.

However, banks should in no way be complacent despite all the favorable figures, the Experian executive said.

"I would not say there is no worry for Hong Kong banks," he said, "Any time you make a loan, there is risk. You can't eliminate all the risks," he observed.

So what is important for lenders is to strike a balance between risk and reward, he suggested.

Aside from credit risk, Sansom sees another challenge for local banks - fiercer competition ahead.

The level of competition in the local banking sector is set to rise as mainland banks increasingly push their way into the local market, he tipped.

Analysts believe small banks will bear the brunt of fiercer competition as they generally have higher fund cost, and smaller business networks.

However, Sansom believes small banks still have chances to thrive. "They can survive the competition if they understand their customers well, build strong relationship with their clients and manage risks effectively."

Otherwise, they may face the fate of being acquired by stronger players, he said.

(HK Edition 09/24/2009 page3)