Although profits for most banks are likely to have fallen in the first half of 2002, the banking industry in Hong Kong continues to deliver a creditable performance.
In the next few weeks, the banks will come out with their results for the first half of the year. Given the general economic situation, manifested in the lack of prudent lending opportunities, and the associated compression of the net interest margin as a result of competition, the majority of banks are likely to be reporting significant falls in profits. This should not come as a surprise. Increasing numbers of personal bankruptcies in the first half of the year did not help, and will require fairly large increases, in percentage terms, in provisions, although the absolute numbers should generally remain quite small. However, the historically low level of interest rates and innovative arrangements to assist mortgagors with property in negative equity to restructure their mortgages should have led to a general fall in non-performing loans, both in absolute terms and as a percentage of total loans.
We will thus continue to see, under the headline announcements, a banking sector in pretty good shape given the difficult circumstances that Hong Kong continues to face. Our bankers in Hong Kong deserve considerable credit for this. They have done extremely well in running their business, in managing risks and in ensuring a high standard of corporate governance. Most importantly, they have continued to provide a safe, efficient and dependable channel of financial intermediation, through thick and thin in the past five most difficult and volatile years. They have continued to serve as the backbone of the financial system of Hong Kong in a period of structural transformation.
They have also met the challenges brought about by the technology revolution and globalisation, coping with these very unusual changes through embracing far-reaching reforms. A good share of these reform measures have been initiated by the bankers themselves - witness the trend of consolidation and the first-class banking services now provided by many through the Internet. Others have been the result of co-operative effort with us, as the banking supervisor with the responsibility, as required in the Banking Ordinance, to promote the general stability and effective working of the banking system.
Much of the credit goes to the Hong Kong Association of Banks for playing a pivotal role in seeking community support and industry consensus on banking reform over the years. This began in 1995 with the progressive relaxation of the old Interest Rate Rules and the introduction of the Real Time Gross Settlement payment system in 1996. These were followed by the more extensive post-1997 programme of banking reform, which focused on the twin objectives of promoting safety and soundness on the one hand and competition on the other. Consideration of a few of the proposals and their implementation details is still in progress, notably deposit insurance and the sharing of information that will enhance efficiency, including the possibility of the wider use of risk related differential pricing, in the extension of credit. Draft legislation on the Deposit Insurance Scheme is scheduled for the end of this year. Work on the establishment of a Commercial Credit Reference Agency is progressing well and the groundwork should be completed this year. And the Privacy Commissioner's Office will soon issue a consultative paper on the sharing of positive data on consumer credit.
There will, I am sure, be more challenges to come. The new Capital Accord, for example, will be a tough one for everybody, including the banking supervisor and the legislature in respectively proposing and scrutinising the necessary legislation, which is likely to be a mammoth task. But I am sure everyone will continue to tackle these issues with the same co-operative spirit that has won for Hong Kong the reputation of possessing one of the most robust and efficient banking systems in the world.
The numbers coming out may not look attractive to the casual observer, but they are nevertheless creditable in today's difficult environment.
Joseph Yam
1 August 2002
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