2002 End-Year Review and Prospects and
Priorities for 2003
David Carse
Deputy Chief Executive
Hong Kong Monetary Authority
28 January 2003
1
Objectives of the presentation
• Describe the performance of the banks (mainly the
retail sector) in 2002
• Discuss the prospects for 2003
• Outline the HKMA’s general aims and main specific
priorities for 2003
2
The banking sector remains well capitalized
%
Capital Adequacy Ratio of All Locally
Incorporated Authorized Institutions
2 5 .0
2 0 .0
1 5 .0
1 0 .0
5 .0
Note: There is a break in series at end-December 2001 owing to a change in the reporting population.
/0 2
Q3
/0 2
Q2
/0 2
Q1
/0 1
Q4
/0 1
Q3
/0 1
Q2
/0 1
Q1
/0 0
Q4
/0 0
Q3
/0 0
Q2
/0 0
Q1
/9 9
Q4
/9 9
Q3
/9 9
Q2
/9 9
Q1
/9 8
Q4
/9 8
Q3
/9 8
Q2
/9 8
Q1
/9 7
Q4
/9 7
Q3
/9 7
Q2
Q1
/9 7
0 .0
3
Volume growth for both deposits and loans remained
sluggish in 2002
Retail Banks
(year-on-year % growth)
%
35
30
25
20
15
10
5
0
- 00
Ma
r-0
1
Ju
n- 0
1
Se
p- 0
1
De
c -0
1
Ma
r-0
2
Ju
n- 0
2
Se
p- 0
2
De
c -0
2
0
De
c
p- 0
0
Se
n- 0
00
Ju
Ma
r-
- 99
9
De
c
p- 9
9
C u s to m e r d e p o s its
Se
n- 9
99
Ju
Ma
r-
- 98
8
De
c
p- 9
8
Se
n- 9
98
Ju
Ma
r-
- 97
7
De
c
p- 9
7
Se
n- 9
Ju
Ma
r-
-10
97
-5
C u s to m e r lo a n s
4
But previous excess deposit growth has resulted in surplus
liquidity which banks have been able to invest profitably
Retail Banks
H K $ b illio n
1 ,4 0 0
1 ,2 0 0
1 ,0 0 0
800
600
400
200
- 02
2
De
c
p- 0
2
Se
n- 0
Ju
02
Ma
r-
- 01
1
De
c
p- 0
1
Se
n- 0
Ju
01
Ma
r-
- 00
0
De
c
p- 0
0
Se
n- 0
00
Excess liquidity is defined as customer deposits minus customer loans
Ju
Ma
r-
- 99
9
De
c
p- 9
9
Se
n- 9
Ju
99
Ma
r-
- 98
8
De
c
8
p- 9
Se
n- 9
98
Ju
Ma
r-
- 97
7
De
c
p- 9
7
Se
n- 9
Ju
Ma
r-
97
0
5
In particular, the banks have invested heavily in higheryielding debt securities
H K $ b illio n
Retail Banks
800
700
600
500
400
300
200
100
02
c-
02
O th e r H K $ p a p e r
De
pSe
n-
02
2
-0
ar
Ju
01
M
c-
01
De
pSe
n-
01
1
Ex cha nge Fund pa pe r
Ju
ar
-0
00
M
c-
00
De
pSe
n-
00
0
-0
ar
Ju
99
M
c-
99
De
pSe
n-
99
9
F o re ig n c u rre n c ie s
Ju
ar
-9
98
M
c-
98
De
pSe
n-
98
8
-9
ar
Ju
97
M
c-
97
De
p-
97
Se
nJu
M
ar
-9
7
0
6
As a result, the net interest margin was slightly higher in
2002, despite some decline in the second half
%
Retail Banks
(quarterly annualised)
2 .4
2 .3
2 .2
2 .1
2 .0
1 .9
/0 2
Q4
/0 2
Q3
/0 2
Q2
/0 2
Q1
/0 1
Q4
/0 1
Q3
/0 1
Q2
/0 1
Q1
/0 0
Q4
/0 0
Q3
/0 0
Q2
/0 0
Q1
/9 9
Q4
/9 9
Q3
/9 9
Q2
/9 9
Q1
/9 8
Q4
/9 8
Q3
/9 8
Q2
/9 8
Q1
/9 7
Q4
/9 7
Q3
/9 7
Q2
Q1
/9 7
1 .8
7
Note: Figure for Q4/02 is provisional.
Q3
/0 2
/0 2
/0 2
/0 1
/0 1
/0 1
/0 1
/0 0
/0 0
/0 0
/0 0
8
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
/9 9
/9 9
/9 9
/9 9
/9 8
/9 8
/9 8
/9 8
/9 7
/9 7
/9 7
/9 7
%
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Asset quality has been improving
Retail Banks
12
10
Classified loans as % of
total loans
6
4
2
Net of specific
provisions
0
8
But rising personal bankruptcies have had an adverse
impact on the consumer portfolio
Personal Bankruptcy Petitions
(quarterly figures)
No.
%
8 ,0 0 0
900
800
7 ,0 0 0
700
6 ,0 0 0
600
5 ,0 0 0
500
4 ,0 0 0
400
300
3 ,0 0 0
200
2 ,0 0 0
100
1 ,0 0 0
0
/0 2
/0 2
Q4
/0 2
Q3
Q2
/0 2
Q1
/0 1
/0 1
Q4
/0 1
Q3
Q2
/0 1
Q1
/0 0
/0 0
Q4
Q3
/0 0
Q2
/0 0
/9 9
Q1
/9 9
Q4
Q3
/9 9
Q2
/9 9
/9 8
Q1
Q4
/9 8
Q3
/9 8
/9 8
Q2
/9 7
Q1
Q4
/9 7
Q3
Q2
Q1
/9 7
-100
/9 7
0
9
N u m b e r (L H S )
y e a r-o n -y e a r c h a n g e (R H S )
This has shown up particularly in sharply higher chargeoffs on credit cards
C h a r g e - o f f r a t io
D e lin q u e n c y r a t io
(% )
(% )
1 6 .0
2 .0
1 .8
1 4 .0
1 .6
1 2 .0
1 .4
1 0 .0
1 .2
8 .0
1 .0
0 .8
6 .0
0 .6
4 .0
0 .4
2 .0
0 .2
/02
Q4
/02
Q3
/02
Q2
/02
Q1
/01
Q4
/01
Q3
/01
Q2
/01
Q1
/00
Q4
/00
Q3
/00
Q2
/00
Q1
/99
Q4
/99
Q3
/99
Q2
/99
Q1
/98
Q4
/98
Q3
/98
Q2
/98
Q1
/97
Q4
/97
Q3
Q2
Q1
/97
0 .0
/97
0 .0
C h a r g e - o ff r a t i o ( q u a r t e r l y a n n u a l i s e d L H S )
D e lin q u e n c y ra t io (R H S )
10
Note: There is a break in series at Q4 2001 owing to an increase in the number of surveyed institutions.
Figures for Q4/02 are up to Nov02 only.
Growth in the number of cards and in
receivables has slowed
No. in million
HK$ billion
Number of Accounts and Total Receivables
of Credit Cards
10
65
60
9
55
8
50
7
45
6
40
5
35
4
30
02
Q
4/
02
Q
3/
02
Q
2/
02
Q
1/
01
Q
4/
01
Q
3/
01
Q
2/
01
Q
1/
00
Q
4/
00
Q
3/
00
Q
2/
00
Q
1/
99
Q
4/
99
Q
3/
99
Q
2/
99
1/
Q
4/
Q
3/
Q
2/
Q
1/
Q
98
20
98
2
98
25
98
3
N u m b e r o f c re d it c a rd a c c o u n t s (L H S )
T o t a l R e c e iva b le s (R H S )
Note: There is a break in series at Q4 2001 owing to an increase in the number of surveyed institutions.
Figures for Q4/02 are up to Nov 02 only.
11
The quality of residential mortgage loans
has continued to be good, helped by some restructuring
(% )
1 .8 0
1 .6 0
1 .4 0
1 .2 0
1 .0 0
0 .8 0
0 .6 0
0 .4 0
0 .2 0
D e lin q u e n c y ra t io
R e s c h e d u le d lo a n ra t io
02
De
c-
02
pSe
02
nJu
2
M
ar
-0
01
cDe
01
p-
nJu
Se
01
1
M
ar
-0
00
cDe
00
pSe
00
Ju
n-
0
M
ar
-0
99
cDe
99
pSe
99
nJu
9
M
ar
-9
98
De
c-
98
pSe
Ju
n-
98
0 .0 0
C o m b in e d ra t io
12
Note: There is a break in series at December 2000 owing to an increase in the number of surveyed institutions.
This is despite the fact that the number and amount of
loans in negative equity has been increasing
H K $ b illio n
N o . i n th o u sa n d
140
74
73
120
72
100
71
70
80
69
60
68
67
40
66
20
65
0
64
D e c -0 1
M a r -0 2
J u n -0 2
S e p -0 2
a m o u n t o f u n se c u r e d n e g a ti v e e q u i ty r e si d e n ti a l m o r tg a g e l o a n s (L H S )
a m o u n t o f se c u r e d n e g a ti v e e q u i ty r e si d e n ti a l m o r tg a g e l o a n s (L H S )
N u m b e r o f n e g a ti v e e q u i ty r e si d e n ti a l m o r tg a g e l o a n s (R H S )
13
2002 therefore saw a combination of positive and negative
factors - reflected in mixed results for the banks
• Positive factors included
– the accrual profits from treasury
– the widening of deposit margins
– fee income from wealth management
– good control of expenses
– the absence of corporate bad debts
• Negative factors included
– lack of volume growth
– squeeze on lending margins
– credit card charge offs
14
Bankers are generally cautious about the outlook for 2003
• Volume growth in lending is likely to remain
sluggish
• It may be more difficult to grow treasury profits
• Continued focus on wealth management initiatives
• Bankruptcies are likely to remain at a high level
• But the hope is that credit card charge-offs will be
lower than in 2002
• This helps to explain why a number of banks are
forecasting higher profits for 2003
15
What are the HKMA’s general aims for 2003?
• Continued close monitoring of AIs’ financial
position and performance
• Use of stress tests to pick up early warning signals
• Continued enhancement of our regulatory
framework
– recent IMF FSAP assessment confirms that there
are no major gaps
– but need to keep up with changing local
environment and changing international
standards
16
What are the HKMA’s specific priorities?
• Focus on non-banking risks
– make sure that these do not compromise the
reputation and core business of the banks
– implement the new securities regime on 1 April
– step up monitoring of the banks’ involvement in
insurance business
• Strengthen credit evaluation and monitoring
– ensure that banks take full account of borrowers’
total indebtedness
– implement CCRA and issue guidelines on
sharing of positive consumer data
17
What are the HKMA’s specific priorities?
• Enhance supervision of other types of banking risk,
particularly interest rate, liquidity and fx risks
• Proceed with the DPS to enhance financial stability
– working on the draft Bill for introduction into
Legco in the next few months
– HKMA to administer the Scheme
• Anti-money laundering and terrorist financing
– issue a new Supplement to our Guideline
18
What are the HKMA’s specific priorities?
• New Capital Accord
– working to introduce by end 2006
– based on QIS 3, aggregate capital ratio of local
banks will fall by about 1.0% under Standardised
Approach (SA)
– note that IRB Approach will not necessarily
result in a lower capital requirement than SA
– therefore smaller banks which use SA will not
necessarily be worse off
– but such banks should still try to enhance their
risk management systems, e.g. loan
classification
19