HONG KONG MONETARY AUTHORITY Annual Report 1996

HONG KONG MONETARY AUTHORITY

HIGH ASSET QUALITY MAINTAINED

Despite the rise in the bad debts provisions, the general quality of assets did not deteriorate significantly and the overall position remained strong by international standards. As at end-1996, the ratio of classified assets (i.e. those rated substandard, doubtful or loss) to total credit exposures was 1.03% for the banking sector as a whole and 2.31% for locally incorporated banks. This represented little change from a year earlier (Table 6).

CAPITAL ADEQUACY REMAINED HIGH

Locally incorporated institutions remained highly capitalised by international standards. As at end-1996, the consolidated capital adequacy ratio of locally incorporated institutions further improved to 17.8% compared with 17.5% at end-1995.

BANKING SECTOR - ANOTHER YEAR OF OPPORTUNITY

Looking ahead, the banking sector remains well capitalised, liquid and profitable and is therefore well placed to adapt to the challenges ahead. The industry is likely to continue to face an increasingly competitive operating environment and it will therefore be essential for authorised institutions to maintain asset quality and continue their efforts to improve operating efficiency. They will also need to ensure that they keep abreast of technological developments such as smart cards and internet banking. Such innovations offer institutions the opportunity to deliver their services to the public at a lower cost. The trend towards diversification of income sources is likely to continue as the banking industry expands into areas such as consumer loans, credit cards, insurance and securities business. Provided that authorised institutions manage the risks prudently, the HKMA welcomes this trend as it helps to reduce the reliance of the industry on a limited range of product lines, such as residential mortgages.