Hong Kong banks' funding and liquidity conditions to remain benign till 2018

But potential funding volatility will come from changes in banks' loan and deposit currency mix.

Moody's expects funding and liquidity conditions to remain benign for Hong Kong banks in 2017 and 2018 despite faster loan growth and likely increases in policy rates. Subdued loan growth in 2016 pushed the system's loan-to-deposit ratio down to 68%, which gives the system ample room to accommodate expected loan growth.

Here's more from Moody's:

There is limited liquidity pressure on the banks' local and foreign currency balance sheets. Driven by faster deposit growth, the system's Hong Kong dollar loan-to-deposit ratio edged down to 77% at end-2016 from 78% at end-2015. The foreign currency loan-to-deposit ratio declined to 60% from 62% with the US dollar loan-to-deposit ratio dropping significantly to 64% from 76%.

Most of our rated Hong Kong banks’ loan books are funded by customer deposits with limited reliance on wholesale funding.

Potential funding volatility will come from changes in banks' loan and deposit currency mix, given the rising interest rate gap between LIBOR and HIBOR rates as the US Federal Reserve raises policy interest rates. Depositors may switch their deposits to US dollar or remit their funds out of Hong Kong as US dollar interest rates rise relative to those in HK dollar. These risks are partially mitigated by the banks’ strong deposit base and sound liquidity positions.

Liquidity is also supported by the large amount of liquid assets the banks hold. Hong Kong banks reported average liquidity coverage ratio of 156.3% at end-2016, well above the regulatory minimum requirement of 70% during the period. Average liquid banking assets/tangible banking assets was also sound for rated banks at 39% at the end of 2016.