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Banking & Insurance Industries
Although the banking and finance industries have not been in the forefront
of the economy fallout of SARS crisis, if the disease is not contained within
a few months and if the slow down of business and consumer activities drags on,
profitability of banks will be seriously hit.
Analysts and rating agencies showed confidence in Hong Kong's Banking system
but nonetheless were wary of the lag effect of rising unemployment, increasing
personal bankruptcies and corporate failure on bank asset quality and profitability.
| "Hong Kong banks could see their profits tumble
as much as 45 per cent year-on-year if the sharp decline in business activity
and consumer spending triggered by the SARS outbreak persists until the end of
the year. The credit ratings of banks in Hong Kong are not expected to be downgraded
due to the health crisis but profit levels will be hit if the current pattern
of business and consumer activity drags on even as the number of new SARS cases
tapers off." |
| - Standard
& Poor's |
| "In all the systems Hong Kong, Singapore, Taiwan
and China, bank profitability and asset quality are expected to deteriorate in
the coming months, albeit to varying degrees, as a result of SARS. Our view is
that Hong Kong's domestic and foreign currency rating is stable as the territory
doesn't have any debt and it has strong foreign currency reserves so there is
not a problem of capital flight, which translates to a stable banking system."
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| - Moody's
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Fitch Ratings was more pessimistic. It downgraded the Bank of East Asia (BEA)
on 29April 03 as the first local lender to have its credit rating downgraded because
of the economic fallout from the SARS outbreak.
| "SARS will not only affect consumer lending,
which will be affected by rising unemployment as personal bankruptcies revive,
but SAS will also affect corporate and commercial lending. Banks' asset quality
will be subject to pressure this year in the overall banking system. |
| - Fitch
Ratings |
SARS' Impact on the Banking Industry
According to Standard and Poor's, if the SARS-induced downturn drags on for
nine months, profitability at Hong Kong banks will decline 35 to 45 per cent from
last year and the economy will contract 1 to 2 per cent. If it last six months,
profits will fall 20 to 25 per cent, as the economy shrinks 1 per cent or produces
flat growth.
The Hong Kong Association
of Banks summarises the impacts on the banking industry as follows:
- Customer traffic in branches has been reduced thus affecting the sales of
wealth management products e.g., mortgages, insurance or investment products to
customers.
- Loan demand has fallen further, in particular mortgage loans as property transactions
(in both primary and secondary markets) have dropped significantly.
- Asset quality may suffer if there are increases in business failures and unemployment.
Small and medium-sized enterprises (SMEs) are the hardest hit sectors of the economy.
While there is little evidence of deterioration in these areas so far, bad debts
are a lagging indicator of the state of the economy and it is possible that bad
debt provisions and charge-offs will increase, although it is too early to say
to what extent the situation will deteriorate.
- Should business begin to fail, unemployment may rise further, which in turn
may lead to an increase in personal bankruptcies and write-offs for lenders.
- The fall in property prices and collateral values caused by SARS may lead
to increase in provision.
SARS' Impact on the Insurance Industry
- The outbreak has increased the claims for medical insurance. In March 2003,
there were about 20 per cent increase on outpatient expenses and 50 per cent on
expenses for x-rays.
- Insurance agents find it difficult to conduct face-to-face meetings with the
client. Even if clients are willing to meet agents, many of them are reluctant
to go to clinics or hospitals to have medical check-ups as required under the
terms of the policies.
- As unemployment increased, there has been an increase in employee compensation
payout. Fire insurance sales dropped because residential transaction slowed. The
hardest hit sector was the travel insurance, sales fell 80 per cent in April 2003.
Positive Outcomes of the SARS Crisis
- There is an increase in usage of electronic banking channels such as telephone
banking, ATMs and Internet banking. HSBC and its subsidiary Hang Seng Bank had
risen 40 per cent since the SARS outbreak began. Bank of East Asia's consumer
banking transactions rose 22 per cent in April, peaking at 90,000 a day during
the worst of the outbreak. The business models of banks may change so as to make
use of the cheaper internet banking operation in order to re-deploy resources
into the development of some other products like wealth management.
- SARS has given people a higher awareness of health and protection for their
families. Which will help increase sales of life and medical insurance in the
long term.
Actions
- Hong Kong's largest banking group says the government should do more to avert
economic damage even if that worsens the Budget deficit.
- Some insurance companies had excluded SARS in the coverage whereas other life
insurance have come up with specific SARS-related products, there is apparent
conflicting underwriting policies adopted by insurers. The industry need to come
up with new initiatives and directions.
Last Modified Date : Tuesday, January 27, 2004 5:10:28 PM
Sources of information:
- Ms. Rona Morgan, Secretary, Hong
Kong Association of Banks. 13th May 2003.
- South China Morning Post
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