Hong Kong banks brace for waves of weak trade and property downturn

Loan growth seen to be flat in 2016.

Hong Kong banks will continue to face a challenging environment over the coming quarters, said BMI Research which maintains its 2016 and 2017 loan growth forecasts of 0.0% and 3.0%, respectively.

"Banks will suffer from the structural slowdown in China, which will weigh on the territory's trade activity, and a further correction in the overvalued domestic residential real estate market. Subdued loan growth and worsening asset quality will weigh on the profitability of these banks," said BMI Research in a report.

With the Chinese economy still mired in a structural slowdown while the Hong Kong residential property market remains vulnerable to a significant correction, BMI believes that the Hong Kong banking system will continue to face a challenging loan growth environment and asset quality will also come under pressure.

These factors, it said, will weigh on the banking system's profitability over the coming months.

Indeed, data from the Hong Kong Monetary Authority (HKMA) showed that total growth in loans and advances has been trending lower since its peak of 21.9% y-o-y in February 2014, having expanded by 0.9% yo-y in July 2016.