Hong Kong banks' China-related opportunities revealed

Check out what Fitch Ratings predicts.

Fitch Ratings says in a new report that Hong Kong's unique relationship with China presents opportunities for its banks as the latter's financial market liberalisation proceeds apace. Fitch believes that banks with international networks are best placed to take advantage of evolving offshore renminbi markets. However, opportunities also exist for domestically focused institutions on a smaller scale.

In the report Fitch highlights that persistent risk monitoring and effective cost management are key if banks are to derive meaningful and sustainable profit from their broad range of China-related activities.

Revenue from offshore renminbi activities, including dim sum bond underwriting, lending and deposit-gathering, thus far remains limited, and is outweighed by related costs. Fitch believes that profit contributions from payment processing and renminbi cross-border trade will remain small over the next two to three years even though they will undoubtedly grow as volumes increase.

A pick-up in renminbi loan demand will likely have the biggest profit impact but Fitch does not foresee a material increase over the near-term. This is because demand from outside of China may be held back by perceived currency risks and restrictions on cross-border renminbi lending.

Fitch expects banks to prioritise investments in their own subsidiary operations on the mainland over increasing their investments in Chinese banks, some of which are aiming for IPOs this year. This would give them another opportunity directly to deploy their renminbi liquidity. Most of the banks' renminbi deposits are yet to be deployed, as reflected in the low system-wide loan-to-deposit ratio of 13% at end-2012.