According to Fitch Ratings, the outlook for Hong Kong’s banking sector has been revised from “neutral” to “improving”, reflecting banks’ stronger earnings forecasts in the second half of 2023.

Fitch analysts said Hong Kong and mainland China’s ongoing recovery would bolster banks’ business volumes, particularly towards the end of the year.

“We expect solid net interest income, improving fee income, and moderating credit costs to drive double-digit profit growth for the sector in 2023,” according to a note by Fitch analysts led by Matt Choi published on Thursday.

During Q1, strong retail sales boosted Hong Kong’s GDP by 2.7% following four straight quarters of contraction. The rating agency has forecast 4% growth for Hong Kong’s economy this year due to a sharp rise in tourist arrivals from the mainland and increased social activities after growth declined by 3.5% in 2022, South China Morning Post reports.

In addition, Hong Kong’s property market is showing indications of stabilisation as home buying sentiment improves, Fitch went on to add. The property price index edged up 5% in Q1, following a 15% drop in 2022. The property sector’s loan balance also rose 0.9% between January and March after declining 3% last year.

Furthermore, the rating agency predicts banks’ loan growth to continue as mortgage loan demand strengthens in an improving economy. Indeed, the average loan-to-value ratio for new residential mortgages has remained steady so far this year at between 55% and 60%.

“We expect banks to maintain a solid level of net interest income in 2023, resulting from higher interest rates. The quarterly net interest margin (NIM) likely peaked in the fourth quarter of 2022, but we expect the banks to generate higher average NIM in 2023 than in 2022, as the full-year impact from the repricing of loans to higher rates kicks in, the Fitch analysts added.

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