Macro-prudential measures good news for Hong Kong banks

It means more resistance to property downturns.

The Hong Kong Monetary Authority recently announced a new round of macro-prudential measures aimed at dampening demand in the local residential property market and curbing upward pressure on home prices.

According to a research note from Moody's Investors Service, the measures are credit positive for Hong Kong banks because they will make the banks more resistant to a property downturn.

Banks that are most affected are Bank of China (Hong Kong) Limited, Hang Seng Bank Limited, and Standard Chartered Bank (Hong Kong) Ltd.

The effect will come not only from their larger residential mortgage exposures relative to their capital, but also their current lower mortgage regulatory risk weights.

These three banks calculate their mortgage regulatory risk weights using the internal ratings-based (IRB) approach under Basel III, and assign single-digit percentage risk weights for mortgages underwritten before February 2013.

With the new rules mandating a new 15% regulatory risk weight minimum floor, the resultant increase in mortgage risk weights will lower banks’ regulatory capital ratios and temper growth.

Here's more from Moody's Investors Service:

In contrast, most midsize Hong Kong banks calculate their risk weights using the standardized approach, with risk weights above the new 15% regulatory floor, and their regulatory capital ratios will be less pressured by the new measures.

The latest measures target smaller residential properties (those worth HKD7 million or less), a segment that has had pronounced price appreciation in recent years. The value of properties under 100 square meters rose by 14% in 2014 after a relatively subdued 2013.

Reflecting this, banks have seen the average size of their new mortgages increase steadily, outpacing increases in household income (see Exhibit 4). The latest data indicate that household indebtedness as a share of GDP has reached historically high levels, a trend that risks exposing borrowers to a higher debt-servicing burden if and when mortgage interest rates increase.

The measure requiring larger minimum down payments for properties under HKD7 million will add to banks’ buffer against loan losses should prices decline. Although the average loan-to-value ratios for newly originated mortgages have hovered around 55% since 2012, individuals that borrow up to the previous loan-to-value limit of 70% nevertheless pose higher risks to banks, and their capacity to borrow will be curtailed by the new measures.

The lower debt servicing ratio requirement will also limit the amount individuals can borrow relative to their income. In addition, banks need to perform comprehensive checks on a borrower’s overall credit profile, including credits from outside the banking system.