2001 End-Year Review
and Prospects and Priorities for 2002
David Carse
Deputy Chief Executive
Hong Kong Monetary Authority
31 January 2002
1
Performance of the banking sector in 2001
• The banking sector remains strong and resilient
• But the operating environment in 2001 was challenging:
– the weak state of the economy (exacerbated by 9/11)
– continued weak loan demand
– continued squeezing of margins, particularly on
mortgage loans
– faster growth in expenses than in income
– rise in personal sector bankruptcies
• Reflecting this, a number of banks will record lower profits
than in 2000
2
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
/ 01
/ 01
/ 01
/ 00
/ 00
/ 00
/ 00
/ 99
/ 99
/ 99
/ 99
/ 98
/ 98
/ 98
/ 98
/ 97
/ 97
/ 97
/ 97
Chart 1
Post-tax operating profit
HKD Mn
12,000
10,000
8,000
6,000
4,000
2,000
0
Retai l B anks
3
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
/ 01
/ 01
/ 01
/ 00
/ 00
/ 00
/ 00
/ 99
/ 99
/ 99
/ 99
/ 98
/ 98
/ 98
/ 98
/ 97
/ 97
/ 97
/ 97
Chart 2
Net interest margin (annualized)
%
2.4
2.2
2.0
1.8
Retai l B anks
4
r- 9
7
r- 9
8
7
r- 9
9
8
r- 0
0
9
r- 0
1
0
No
Se
v-0
1
p- 0
1
Ju
n- 0
1
Ma
c-0
p- 0
0
De
Se
Ju
n- 0
0
Ma
c-9
p- 9
9
De
Se
Ju
n- 9
9
Ma
c-9
p- 9
8
De
Se
Ju
n- 9
8
Ma
c-9
p- 9
7
De
Se
Ju
n- 9
7
Ma
Chart 3
Growth of customer deposits(year-on-year)
%
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
R e tai l B anks
5
r- 9
7
r- 9
8
7
r- 9
9
8
r- 0
0
9
r- 0
1
0
No
Se
v-0
1
p- 0
1
Ju
n- 0
1
Ma
c-0
p- 0
0
De
Se
Ju
n- 0
0
Ma
c-9
p- 9
9
De
Se
Ju
n- 9
9
Ma
c-9
p- 9
8
De
Se
Ju
n- 9
8
Ma
c-9
p- 9
7
De
Se
Ju
n- 9
7
Ma
Chart 4
Growth of loans for use in Hong Kong
(year-on-year)
%
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
-5.0
R e tai l B anks
6
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
/ 01
/ 01
/ 01
/ 00
/ 00
/ 00
/ 00
/ 99
/ 99
/ 99
/ 99
/ 98
/ 98
/ 98
/ 98
/ 97
/ 97
/ 97
/ 97
Chart 5
Cost-income ratio
%
48
46
44
42
40
38
36
34
32
Retai l B anks
7
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
/ 01
/ 01
/ 01
/ 00
/ 00
/ 00
/ 00
/ 99
/ 99
/ 99
/ 99
/ 98
/ 98
/ 98
/ 98
/ 97
/ 97
/ 97
/ 97
Chart 6
Bad debt charge as % of average total assets
%
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
Retai l B anks
8
r-9
7
r-9
8
7
r-9
9
8
r-0
0
9
r-0
1
0
Se
p-0
1
Ju
n-0
1
Ma
c-0
p-0
0
De
Se
Ju
n-0
0
Ma
c-9
p-9
9
De
Se
Ju
n-9
9
Ma
c-9
p-9
8
De
Se
Ju
n-9
8
Ma
c-9
p-9
7
De
Se
Ju
n-9
7
Ma
Chart 7
Gross classified loans as % of total loans
%
12.0
10.0
8.0
6.0
4.0
2.0
0.0
Retai l B anks
9
Chart 8
Asset quality of credit cards and mortgage
Charge-off ratio
delinquency ratio
loans
(Survey
Figures)
(% )
(% )
7.0
1.6
6.0
1.4
1.2
5.0
1.0
4.0
0.8
3.0
0.6
2.0
0.4
Mortgage delinquency ratio*
1
-0
ov
01
N
p-
01
Se
n-
-0
Ju
ar
M
ec
-0
1
0
00
D
pSe
n-
Ju
-0
ar
00
0
9
-9
M
ec
D
pSe
nJu
-9
ar
99
9
8
-9
M
ec
D
pSe
n-
-9
Ju
ar
98
8
7
-9
M
ec
D
pSe
n-
97
7
Ju
ar
-9
-9
M
ec
D
Charge-off ratio (credit card)
99
0.0
98
0.0
97
0.2
6
1.0
Credit card delinquency ratio
* S tarting from D ecem ber 2000, the reporting population for the survey has been
increased from 32 to 38 institutions. T herefore, figures after D ecem ber 2000 are not
strictly com parable w ith those in the previous m onths.
10
Chart 9
Consolidated capital adequacy ratio of
locally incorporated authorized institutions
(AIs)
%
21.0
20.0
19.0
18.0
17.0
16.0
p- 0
1
Se
Ju
n- 0
1
0
r- 0
1
Ma
c-0
De
p- 0
0
Se
Ju
n- 0
0
r- 0
0
Ma
9
c-9
De
p- 9
9
Se
Ju
n- 9
9
8
r- 9
9
Ma
c-9
De
p- 9
8
Se
Ju
n- 9
8
7
r- 9
8
Ma
c-9
De
p- 9
7
Se
Ju
n- 9
7
Ma
r- 9
7
15.0
Al l l o c al AIs
11
Outlook for the banking sector in 2002
• In the absence of major shocks, the forecasts of the banks
are generally suggesting:
– some growth in lending (albeit modest)
– no major pick-up in non-performing commercial loans (although
there are concerns about growing consumer loan defaults)
– provisions may rise, but upsurge not expected
– generally, some profit growth
• However, the outlook is very difficult to predict and the
scope for variation is more on the downside
• The operating environment is unlikely to show much
improvement until later in the year
12
Outlook for the banking sector in 2002 (2)
• Banks’ strategies are likely to include focusing on:
– diversifying income by source and by type
– enhancement of asset/liability management
– cost-cutting (including relocation of back offices and
outsourcing)
– developing business in Mainland China
• Consolidation will remain an issue for the local banks and
is likely to continue
13
HKMA achievements in 2001 (1)
• Interest rate deregulation - completed on schedule
• Deposit insurance - framework for funding and premium
developed
• Three building condition -removed
• Code of Banking Practice - revised version published
• Consumer protection - comparative study of arrangements
in HK, UK and Australia published
• Banking Amendment Ordinance 2001 - new framework
for managers put in place (including new guideline)
• New Capital Accord - impact study on HK conducted
14
HKMA achievements in 2001 (2)
• Securities and Futures Bill - framework for regulation of
“registered institutions” finalised
• Financial disclosure - new guidelines published
• Money laundering - guidance issued on controls against
money laundering and terrorist financing
• Supervisory policy manual (SPM) - 30 modules (about
half of the total) completed
• Negative equity - guideline on LTV ratio issued and
statistics collected
• Risk based supervision - rolled out to foreign banks
15
HKMA priorities for 2002
• Banking supervision
– the conduct of day-to-day supervision through tools such as on-site
examinations and off-site reviews
• Banking policy
– the formulation of supervisory policies (e.g. on capital adequacy)
designed to promote the safety and soundness of banks
• Banking development
– the formulation of policies designed to promote the development
of the banking industry (plus specialised supervision of securities
business, money laundering and e-banking)
16
Banking supervision: priorities
• On-site examination program - focus on asset quality
• Risk-based supervision - further develop through the
introduction of greater automation and standardisation of
work processes and through quality assurance
• Securities business, money laundering and e-banking provide support to the specialised teams
• Consolidation process - assist, promote and monitor
• Managers - apply the new regime under the Banking
Ordinance
• Licensing - process possible requests to upgrade from
RLB to licensed bank under new market entry regime
17
Banking policy: priorities
• New Capital Accord - participate in the next consultation
and further develop plans for implementation in HK
• Loan classification system - review in the light of the
New Accord
• Other supervisory policies (e.g. interest rate risk) prepare new or revised guidelines for inclusion in SPM
• Basel Core Principles - complete second review of Hong
Kong’s compliance
• Property market - monitor developments, including trends
in negative equity
• Review of statistical returns - aim to reduce reporting
burden
18
Banking development: priorities
• DIS - final consultation paper in Q1 and draft Bill in Q4
• Market entry criteria - implement proposals taking
account of response to consultation
• Sharing of personal credit data - work with the banks,
Privacy Commissioner and Consumer Council to develop
an acceptable framework
• CCRA - aim to implement a voluntary scheme
• Consumer protection - monitor compliance with the
revised Code of Banking Practice and participate in the
new COBP Committee
19
Specialised supervision: priorities
• Securities business - begin to implement the new regime
under the Securities and Futures Bill
• Money laundering - conduct in-depth examinations,
participate in fight against terrorist financing and revise
guideline
• E-banking - conduct in-depth examinations and prepare
guidelines on e-banking issues and on business continuity
planning (including lessons learned from 9/11)
20
Closing remarks
• All the market reform measures embarked upon in 1999 have
been addressed one way or another - as a result, the banking
industry is now more free and competitive than before
• But, as indicated earlier, we still have a lot to keep us occupied
and we have to be alert to new challenges that may arise
• Apart from the specific priorities mentioned, an underlying
objective will be to try to improve our own processes so as to
provide top quality supervision in as cost-effective a manner as
possible
21