2006 End-Year Review and
Prospects and Priorities for 2007
Hong Kong Monetary Authority
31 January 2007
Performance of the banking sector in 2006 (1)
• Banking system remains sound and profitable
• Strong deposit growth (16%) outstripped steady loan growth
(4%)
• With liquidity so plentiful, competition has been intense,
particularly in the mortgage market
• Rising costs remain an issue, but new provisions remain low and
net interest margins have recovered somewhat
• Consequently, pre-tax operating profits recorded good growth
1
Performance of the banking sector in 2006 (2)
2006
2005
– Classified loan ratio
1.19% (Sep 06)
1.37%
– Mortgage delinquency ratio
0.20% (Dec 06)
0.19%
– Credit card charge-off ratio
(year-to-date annualised)
3.02% (Q3/06)
2.81%
– No. of negative equity mortgages
8,800 (Sep 06)
11,000
15.0% (Sep 06)
14.8%
1.80%*
1.68%
42.7%*
41.9%
• Overall asset quality (good )
• Average consolidated CAR
• Net interest margin (annualised)
• Cost-to-income ratio
*Preliminary figures
2
Banking sector issues arising in 2006
– Interest rate environment
– High level of liquidity and intensifying price competition
– 2 major projects enhanced the safety and soundness of the
banking system:
– Basel II Capital & Disclosure Rules passed
– Deposit Protection Scheme successfully introduced
• Growing wealth management and investment advisory activities
• Possible outbreak of influenza pandemic
• Internet disruption caused by Taiwan earthquake
3
Outlook for the banking sector in 2007
• Challenges remain due to keen competition and uncertain
interest rate environment
• Risks and challenges
– Interest rate and market risks
– Implementation of Basel II
– AML/CFT
• Opportunities
– Expansion of RMB business
– Mainland subsidiarisation
– Growth of Hong Kong as an IFC
– Wealth management business
4
HKMA priorities for 2007 (1)
• Basel II initiatives
– Capital & Disclosure Rules – working on supplementary
guidance
– Parallel reporting – indicates implementation proceeding
smoothly (effect on CAR: -1%)
– IRB validation – half dozen AIs working towards IRB adoption
over next few years
– Operational risk – formation of a specialist team
– Basel II related systems – conduct of technology reviews
• Lending businesses
– Monitor any observable relaxation in AIs’ underwriting criteria
due to competitive pressure
5
HKMA priorities for 2007 (2)
• AML/CFT
– Industry Working Group
– FATF Mutual Evaluation of Hong Kong - November
– Continue on-site examinations and off-site surveillance
• Mainland related business
– Expanded scope of RMB business
– Ensure the subsidiarisation and business expansion plan of
AIs are implemented properly
• Enhancing financial sector / regional surveillance
• Review of Code of Banking Practice
6
HKMA priorities for 2007 (3)
• Assist the Deposit Protection Board to operate the DPS
– Monitor compliance of Scheme members with DPS rules
and guidelines
– Continuously refine the payout system and procedures
– Manage the DPS Fund
– Undertake promotional activities to enhance public
awareness and understanding of the DPS
• Licensing
– Overseas interests to enter the Hong Kong banking
market remain high
– Continue to streamline procedures so as to maintain an
efficient licensing service without sacrificing prudential
standards
7
HKMA priorities for 2007 (4)
• Securities enforcement concerning AIs
– Devote more dedicated resources to securities
enforcement matters and related complaints
– Implement streamlined disciplinary procedures to enhance
efficiency
– Continue cooperation with SFC to ensure consistency in
enforcement approach
8
Concluding remarks
• Banking system remains sound but challenges remain due to
keen competition and uncertain interest rate environment
• Risks and challenges: interest rate/market risks; Basel II
implementation; exploiting China opportunities; AML/CFT
• DPS was launched successfully, continued effort is required
to enhance its operation and reinforce public confidence in it
9
2006 End-Year Review and
Prospects and Priorities for 2007
Hong Kong Monetary Authority
31 January 2007