Hong Kong's banks are likely to remain "resilient" even as pressure mounts on their earnings amid one of the city's worst political crises and the 15-month-long US-China trade war weighs on the economy, according to Moody's Investors Services.

Stephen Long, managing director for global banking at Moody's, said the credit rating agency, at this point, does not expect ratings downgrades for Hong Kong lenders, but said there could be some weakening within their "current rating bounds".

"Hong Kong banks have a strong balance sheet. Their liquidity and asset quality going into this weakening operating environment caused by the protests " and to some extent the trade issues have affected Hong Kong as well," Long said at a media briefing on Tuesday. "We'll see worsening asset quality and weaker profits, but still very resilient in terms of the entire banking system."

Protests and unrest over 19 straight weekends have cut into retail sales, discouraged people from eating out and caused a severe drop in tourists in August, the worst monthly decline since the severe acute respiratory syndrome (Sars) outbreak in 2003.

Stephen Long, managing director for global banking at Moody's, says that Hong Kong banks have a strong balance sheet. Photo: Twitter alt=Stephen Long, managing director for global banking at Moody's, says that Hong Kong banks have a strong balance sheet. Photo: Twitter

The demonstrations have been marked in recent weeks by increasingly violent confrontations between police and more radical protesters, vandalism to mainland-affiliated businesses and damage to the MTR system, which have forced it to close early for repairs for the past week.

The protests grew out of opposition to a controversial extradition law that would have made it easier to send criminal suspects to China, but have evolved into a wide set of issues, including income inequality and mainland China's growing influence over the city despite the "one country, two systems" principle. Hong Kong Chief Executive Carrie Lam Cheng Yuet-ngor said she would formally withdraw the bill in September, but that has done little to dissuade demonstrators.

Already weakened by a trade war that has weighed on global trade and future business investment, Hong Kong's economy shrunk by a much worse than expected 0.4 per cent in the second quarter. In August, the city's government lowered its forecast for gross domestic product growth to zero to 1 per cent for the year. Several economists have said that they believe the city's economy could contract this year.

"The Hong Kong economy is facing stiffer growth headwinds amid continued instability and risks have tilted to our bear-case scenario," Bank of America Merrill Lynch economists Helen Qiao and Miao Ouyang said in a research note on Tuesday. "Although the government has announced stimulus packages to support the economy, a recession in [second half of 2019] seems unavoidable."

Banks implement staff contingency plans as protests rage

On Monday, the Hong Kong Monetary Authority said it would cut a countercyclical capital buffer " requirement that banks set aside a certain amount of capital in good times and still be able to engage in lending during downturns " by 50 basis points to 2 per cent, the first reduction since 2015. The HKMA estimates the move would allow banks to inject as much as HK$300 billion (US$38 billion) back into the financial system.

Hong Kong adopts own 'quantitative easing' to bolster economy

"We expect the tougher macro environment to translate into weaker asset quality [at banks]," Sonny Hsu, a senior credit officer at Moody's, said on Tuesday. "There will be some time between the weaker macro picture and that being reflected in banks' asset quality."

Government relief measures, namely a guarantee scheme for loans to small and medium-sized businesses, should somewhat offset the hit on asset quality, Hsu said.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2019 South China Morning Post Publishers Ltd. All rights reserved.

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