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2006 End-Year Review and Prospects and Priorities for 2007

2006 End-Year Review and Prospects and Priorities for 2007. Hong Kong Monetary Authority 31 January 2007. Performance of the banking sector in 2006 (1). B anking system remains sound and profitable Strong deposit growth (16%) outstripped steady loan growth (4%)

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2006 End-Year Review and Prospects and Priorities for 2007

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  1. 2006 End-Year Review and Prospects and Priorities for 2007 Hong Kong Monetary Authority 31 January 2007

  2. Performance of the banking sector in 2006 (1) • Banking system remains sound and profitable • Strong deposit growth (16%) outstripped steady loan growth (4%) • With liquidity so plentiful, competition has been intense, particularly in the mortgage market • Rising costs remain an issue, but new provisions remain low and net interest margins have recovered somewhat • Consequently, pre-tax operating profits recorded good growth

  3. Performance of the banking sector in 2006 (2) 20062005 1.19% (Sep 06) 1.37% 0.20% (Dec 06) 0.19% 3.02% (Q3/06) 2.81% 8,800 (Sep 06) 11,000 15.0% (Sep 06) 14.8% 1.80%* 1.68% 42.7%* 41.9% • Overall asset quality (good ) • Classified loan ratio • Mortgage delinquency ratio • Credit card charge-off ratio (year-to-date annualised) • No. of negative equity mortgages • Average consolidated CAR • Net interest margin (annualised) • Cost-to-income ratio *Preliminary figures

  4. Banking sector issues arising in 2006 • Interest rate environment • High level of liquidity and intensifying price competition • 2 major projects enhanced the safety and soundness of the banking system: • Basel II Capital & Disclosure Rules passed • Deposit Protection Scheme successfully introduced • Growing wealth management and investment advisory activities • Possible outbreak of influenza pandemic • Internet disruption caused by Taiwan earthquake

  5. Outlook for the banking sector in 2007 • Challenges remain due to keen competition and uncertain interest rate environment • Risks and challenges • Interest rate and market risks • Implementation of Basel II • AML/CFT • Opportunities • Expansion of RMB business • Mainland subsidiarisation • Growth of Hong Kong as an IFC • Wealth management business

  6. HKMA priorities for 2007 (1) • Basel II initiatives • Capital & Disclosure Rules – working on supplementary guidance • Parallel reporting – indicates implementation proceeding smoothly (effect on CAR: -1%) • IRB validation – half dozen AIs working towards IRB adoption over next few years • Operational risk – formation of a specialist team • Basel II related systems – conduct of technology reviews • Lending businesses • Monitor any observable relaxation in AIs’ underwriting criteria due to competitive pressure

  7. HKMA priorities for 2007 (2) • AML/CFT • Industry Working Group • FATF Mutual Evaluation of Hong Kong - November • Continue on-site examinations and off-site surveillance • Mainland related business • Expanded scope of RMB business • Ensure the subsidiarisation and business expansion plan of AIs are implemented properly • Enhancing financial sector / regional surveillance • Review of Code of Banking Practice

  8. HKMA priorities for 2007 (3) • Assist the Deposit Protection Board to operate the DPS • Monitor compliance of Scheme members with DPS rules and guidelines • Continuously refine the payout system and procedures • Manage the DPS Fund • Undertake promotional activities to enhance public awareness and understanding of the DPS • Licensing • Overseas interests to enter the Hong Kong banking market remain high • Continue to streamline procedures so as to maintain an efficient licensing service without sacrificing prudential standards

  9. HKMA priorities for 2007 (4) • Securities enforcement concerning AIs • Devote more dedicated resources to securities enforcement matters and related complaints • Implement streamlined disciplinary procedures to enhance efficiency • Continue cooperation with SFC to ensure consistency in enforcement approach

  10. Concluding remarks • Banking system remains sound but challenges remain due to keen competition and uncertain interest rate environment • Risks and challenges: interest rate/market risks; Basel II implementation; exploiting China opportunities; AML/CFT • DPS was launched successfully, continued effort is required to enhance its operation and reinforce public confidence in it

  11. 2006 End-Year Review and Prospects and Priorities for 2007 Hong Kong Monetary Authority 31 January 2007

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